The elected members of anti-immigrant parties in the Netherlands and Sweden have recently joined government coalitions and as a result have important direct influence on immigration policies. More indirect influence on policies have been achieved by anti-immigrant parties, which have recently gained 29 percent of the votes cast in Switzerland, 22 percent in Norway, 17 percent in Austria and 14 percent in Denmark. (In the 2008 federal elections in Canada 6.9 percent of the vote went to the Green party and 18.2 percent to the NDP). In Germany Chancellor Angela Merkel caused a stir around the world when recently she said “Multiculturalism in Germany has failed”.
What is behind the growing public support of anti-immigrant parties and concern over multiculturalism in Europe? The ruling elites argue that the current economic crisis has activated the ever latent populist, extreme-right, racist and anti-Islam views held by a minority of the population. These elites expect that the anti-immigrant parties will lose support and the critics of multiculturalism will be silent once economic prosperity is returned. The validity of this assertion is doubtful in the light of the fact that anti-immigrant parties in Europe prospered well before the 2008 economic crisis.
A more plausible explanation of the growth in anti-immigrant sentiments in Europe is the public’s perceived threat to the very essence of their national identity and a sense of belonging, which are anchored in their cultural, social, religious and economic institutions. The threat is seen to emanate from immigrant communities that fail to integrate into the societies of their host countries and often challenge existing institutions, all encouraged by official policies of multiculturalism.
For example, the viability of Scandinavia’s generous social programs is threatened by practices of some immigrants who do not adhere to the traditional behavioural norms. Muslim minorities in several countries are demanding the selective application of Sharia laws, the acceptance of honour killings and head scarves for women. Practices of civil society, like queuing for services sometimes are disregarded by some immigrants. In Central and Western Canada, a number of criminal gangs dominated by members of immigrant communities engage in much publicized violence.
In several European countries the growth of anti-immigrant parties has prompted some changes in immigration and multicultural policies. In Canada, Jason Kenney, the Minister of Citizenship and Immigration released a new citizenship guide with very similar goals.
These new policies require immigrants to know or learn their host countries’ languages and to accept existing national laws, institutions and values rather than demand changes to accommodate their own cultural norms. The granting of citizenship will become conditional upon meeting these and other requirements.
These new policies basically represent a repudiation of multiculturalism, which had been created with the expectation that it would end strife and wars. I believe that this repudiation has a deep root. The need of human beings to belong to and unite behind a common culture, institutions and values is part of human nature. This need is hard-wired because of its survival value during evolutionary history. It cannot be overcome by government policies and coercion aimed at its elimination.
The world’s experience with policies designed to create socialist and communist utopias provides an interesting historic parallel. These policies were based on the notion that selfish behaviour of individuals operating in a capitalist free market system created income inequalities, economic crises, environmental degradation and other alleged pathologies. Policies to create these utopias ended in the face of persistent selfish behaviour that, like the need to unite behind a common culture is deeply embedded in human nature and is hard-wired because of its evolutionary survival value.
Canada has been spared the political turmoil that in Europe resulted from the creation and success of anti-immigrant parties. However, the public’s desire to preserve Canada’s culture, institutions and values has been growing and undoubtedly has played a role in the recent federal government’s issue of the citizenship guide for immigrants.
Some concerned Canadians are not satisfied with this guide and have created the organization Canadians for Immigration Policy Reform, which lobbies for more changes to current immigration policies and maintains a website to present facts and analysis of the issues. The government ignores at its own risk the public’s desire for the further modification of multicultural policies for the protection of Canada’s culture, institutions and values.
Herbert Grubel
Professor of Economics (Emeritus), Simon Fraser University
Senior Fellow, the Fraser Institute
Thursday, December 16, 2010
Thursday, October 21, 2010
Air Canada and Corporate Welfare
The regulation of the Canadian air industry is supposed to ensure that the public has access to safe, reliable flights at the lowest cost. This mandate has been perverted. The regulatory regime now subsidizes the employees and owners of Air Canada at the expense of the taxpayer and travelling public. Nothing drives home this point better than the current dispute with the United Arab Emirates over landing rights in Canada for its two national airlines, Emirates and Etihat.
These two airlines requested the right to service Toronto more often and to offer flights to Vancouver and Calgary. If these requests had been granted, Canadians would have saved money, benefited from greater convenience, or both.
These benefits are evident from the fact that the Emirates Airbus 380 (the largest passenger plane in existence) flying now twice a week between Toronto and Dubai is nearly always sold out. The large number of Canadians of Indian and Pakistani origin find Dubai a very convenient gate way, offering many daily flights from there to the Indian subcontinent.
Dubai also has good connections to other countries in the Mideast and Africa, which are the destination of many tourists and business travellers from Western Canada and especially oil experts from Alberta. All of these flyers would be able to avoid stopovers in Toronto and enjoy shorter travel times in the air.
The reason for the refusal by the government to grant these UAE airlines
more landing rights in Canada is that it would cause Air Canada to lose millions of dollars in revenues and profits because, to keep its current passengers from flying with these airlines, it would have to lower fares, improve service and offer schedules more convenient for customers. These costs reflect the value of the benefits, which Canadians would have enjoyed if regulators had decided to allow UAE airlines access to Canada. The value of these lost benefits represents a subsidy to Air Canada.
This subsidy is a clear case of corporate welfare, even if it does not show up in any government budgets. It violates the spirit of free trade and is equivalent to prohibiting the import of any good just because it would cause Canadian producers to lose money. It therefore is a violation of existing international free trade agreements.
International relations are a game of tit for tat. The government of the UAE has just done the tat. It has cancelled Canada’s privilege to use the Camp Mirage airport near Dubai as a staging area for the war in Afghanistan. The shift of these military flights to other locations will cost taxpayers millions, all because regulators protected the interest of Air Canada.
Air Canada is likely to have argued against the landing rights for the UAE airlines on the grounds that they benefit from unfair government subsidies. If this is true, Canadian consumers should rejoice in receiving these subsidies from the taxpayers of the UAE. However, since such subsidies are illegal under international agreements, a complaint lodged with the World Trade Organization would lead to their elimination.
But it is not clear that these airlines are subsidized. They may just be more efficient and less burdened than Air Canada with pensions, wages and work rules extracted by unionized labour in the past. Dealing with the financial problems caused by these conditions should not be the responsibility of Canada’s travelling public or taxpayers in general.
How can we explain the regulatory decisions that provide subsidies to Air Canada at the expense of the Canadian public? Research has shown that the design and operation of regulation often is hijacked by the regulated industry to serve its own interests rather than those of the public. One of the reasons for this result is that advice to the regulators predominantly comes from the people in the industry, who are the best experts available but who also know what the industry’s coveted interests are.
Politicians also influence regulatory rules and decisions since they know that any policies that affect adversely the interests of Air Canada result in the loss of votes from the employees and other beneficiaries of Air Canada while the public is either ignorant of or not interested in casting their votes in opposition to these policies.
It is high time that Ottawa stops corporate welfare going to Air Canada through its regulatory decisions, allows full international competition and limits the use of its powers to ensure the safety of passengers. Air Canada has an excellent brand name, management and staff. It can and will survive, if not prosper, without government protection.
Herbert Grubel
Professor of Economics (Emeritus), Simon Fraser University
Senior Fellow, The Fraser Institute
These two airlines requested the right to service Toronto more often and to offer flights to Vancouver and Calgary. If these requests had been granted, Canadians would have saved money, benefited from greater convenience, or both.
These benefits are evident from the fact that the Emirates Airbus 380 (the largest passenger plane in existence) flying now twice a week between Toronto and Dubai is nearly always sold out. The large number of Canadians of Indian and Pakistani origin find Dubai a very convenient gate way, offering many daily flights from there to the Indian subcontinent.
Dubai also has good connections to other countries in the Mideast and Africa, which are the destination of many tourists and business travellers from Western Canada and especially oil experts from Alberta. All of these flyers would be able to avoid stopovers in Toronto and enjoy shorter travel times in the air.
The reason for the refusal by the government to grant these UAE airlines
more landing rights in Canada is that it would cause Air Canada to lose millions of dollars in revenues and profits because, to keep its current passengers from flying with these airlines, it would have to lower fares, improve service and offer schedules more convenient for customers. These costs reflect the value of the benefits, which Canadians would have enjoyed if regulators had decided to allow UAE airlines access to Canada. The value of these lost benefits represents a subsidy to Air Canada.
This subsidy is a clear case of corporate welfare, even if it does not show up in any government budgets. It violates the spirit of free trade and is equivalent to prohibiting the import of any good just because it would cause Canadian producers to lose money. It therefore is a violation of existing international free trade agreements.
International relations are a game of tit for tat. The government of the UAE has just done the tat. It has cancelled Canada’s privilege to use the Camp Mirage airport near Dubai as a staging area for the war in Afghanistan. The shift of these military flights to other locations will cost taxpayers millions, all because regulators protected the interest of Air Canada.
Air Canada is likely to have argued against the landing rights for the UAE airlines on the grounds that they benefit from unfair government subsidies. If this is true, Canadian consumers should rejoice in receiving these subsidies from the taxpayers of the UAE. However, since such subsidies are illegal under international agreements, a complaint lodged with the World Trade Organization would lead to their elimination.
But it is not clear that these airlines are subsidized. They may just be more efficient and less burdened than Air Canada with pensions, wages and work rules extracted by unionized labour in the past. Dealing with the financial problems caused by these conditions should not be the responsibility of Canada’s travelling public or taxpayers in general.
How can we explain the regulatory decisions that provide subsidies to Air Canada at the expense of the Canadian public? Research has shown that the design and operation of regulation often is hijacked by the regulated industry to serve its own interests rather than those of the public. One of the reasons for this result is that advice to the regulators predominantly comes from the people in the industry, who are the best experts available but who also know what the industry’s coveted interests are.
Politicians also influence regulatory rules and decisions since they know that any policies that affect adversely the interests of Air Canada result in the loss of votes from the employees and other beneficiaries of Air Canada while the public is either ignorant of or not interested in casting their votes in opposition to these policies.
It is high time that Ottawa stops corporate welfare going to Air Canada through its regulatory decisions, allows full international competition and limits the use of its powers to ensure the safety of passengers. Air Canada has an excellent brand name, management and staff. It can and will survive, if not prosper, without government protection.
Herbert Grubel
Professor of Economics (Emeritus), Simon Fraser University
Senior Fellow, The Fraser Institute
Friday, October 15, 2010
Cancel the Obituaries for the Euro
When Greece faced a serious financial crisis in 2010, many Euro-sceptics rubbed their hands in glee and wrote obituaries for the currency union. It now looks as if these obituaries have been premature. The Greek government adopted policies that are returning the country to economic stability. Domestic protests against these policies appear to have run their course.
The value of the Euro reflects the confidence the worlds’ investors have in the currency. While it was worth 1.51 US dollars before the crisis in December 2009 and had fallen to 1.19 at the height of the crisis in June 2010, it has since then climbed steadily and reached 1.40 in the middle of October.
The writers of the obituaries for the Euro based their views on the premise that the people of countries like Greece would suffer unnecessarily because its government could no longer use monetary, exchange rate and fiscal policies to deal with unemployment and other economic calamities. In response to these sufferings, they would flee the yoke of the Euro, adopt their own currencies and quickly eliminate these problems.
The main reason why the Euro-sceptics were wrong is that the problems of Greece and other countries like Italy and Spain have not been caused by the traditional business cycles and economic shocks. They have been caused by persistent economic mismanagement rooted in social-democratic ideology, which cannot be cured by Keynesian monetary and fiscal policies but require external pressures on politicians to mend their ways.
The driving force behind Greece’s economic mismanagement during the postwar years has been a belief in the idea that governments can do better than free markets and create a socialist utopia. It resulted in many unsustainable policies. One of these was that the government protected workers and firms from the impact of shifts in international comparative advantage. When Greek shipyards and the producers of textiles could no longer compete with foreign producers, the government bought the firms in trouble. It kept most of the workers or induced them into early retirement.
At the same time, Greece expanded public sector employment to deal with high levels of unemployment, which to a large extent were caused by its own misguided industrial policies. It used economic and financial regulation intensively to advance its ideological goals. It used tax and social spending policies to offer security from cradle to grave and equalize incomes.
The consequences of these policies were unavoidable. They resulted in large fiscal deficits due to bloated public sector employment and the fiscally irresponsible operation of public enterprises; low average retirement age for Greek workers; high levels of corruption and tax evasion; and most important for the longer run, slow productivity growth.
While most of these consequences worked slowly and were hidden from public scrutiny, the fiscal deficits were not. To finance them, Greek governments forced the Greek Central Bank into buying its bonds and paying for them by printing money. As a result, between 1971 and 1994 inflation averaged 17.7 percent annually. The inflation in turn caused the value of the drachma to fall to about 10 percent of its initial trade weighted average value between 1964 and 1999.
When Greece adopted the Euro in 1999, the inflationary financing of deficits through its central bank ended because the central bank lost its ability to print money. For some years, inexplicably, private sector investors continued to buy Greek bonds without asking for risk premiums commensurate with the unsustainable growth in the public debt. However, the global financial and economic crisis that started in 2008 changed all that. There were predictions that Greece would be unable to sell its bonds and declare bankruptcy.
That was the time when Euro sceptics had their day and the currency was under attack. But instead of resulting in a crumbling of the Euro, the attack produced international commitments to buy Greek bonds under the condition that the government adopt policies that would restore fiscal balance and modify the social democratic policies discussed above.
The beneficiaries of government programs demonstrated and rioted against the implementation of changes that would damage their interests. However, the Greek government had no choice but to make the needed changes and resisted their blandishments. Chances are that politicians welcomed the external pressures for policy changes that they knew were needed but which under normal conditions would have guaranteed electoral defeat. Doing so is perfectly consistent with publicly blaming outside forces for the problems suffered by interest groups.
There is no doubt that the newly adopted policies will benefit all Greeks. The ability to run fiscal deficits will be constrained more than ever before. The resources spent in the past by interest groups lobbying the government for more benefits and regulation will go into productive efforts in the private sector. Inflation will continue to be limited to rates in the rest of Europe.
The Euro system has proven sceptics wrong. Criteria for membership in an optimum currency have turned out to have been endogenous, just as some academics had predicted.
The value of the Euro reflects the confidence the worlds’ investors have in the currency. While it was worth 1.51 US dollars before the crisis in December 2009 and had fallen to 1.19 at the height of the crisis in June 2010, it has since then climbed steadily and reached 1.40 in the middle of October.
The writers of the obituaries for the Euro based their views on the premise that the people of countries like Greece would suffer unnecessarily because its government could no longer use monetary, exchange rate and fiscal policies to deal with unemployment and other economic calamities. In response to these sufferings, they would flee the yoke of the Euro, adopt their own currencies and quickly eliminate these problems.
The main reason why the Euro-sceptics were wrong is that the problems of Greece and other countries like Italy and Spain have not been caused by the traditional business cycles and economic shocks. They have been caused by persistent economic mismanagement rooted in social-democratic ideology, which cannot be cured by Keynesian monetary and fiscal policies but require external pressures on politicians to mend their ways.
The driving force behind Greece’s economic mismanagement during the postwar years has been a belief in the idea that governments can do better than free markets and create a socialist utopia. It resulted in many unsustainable policies. One of these was that the government protected workers and firms from the impact of shifts in international comparative advantage. When Greek shipyards and the producers of textiles could no longer compete with foreign producers, the government bought the firms in trouble. It kept most of the workers or induced them into early retirement.
At the same time, Greece expanded public sector employment to deal with high levels of unemployment, which to a large extent were caused by its own misguided industrial policies. It used economic and financial regulation intensively to advance its ideological goals. It used tax and social spending policies to offer security from cradle to grave and equalize incomes.
The consequences of these policies were unavoidable. They resulted in large fiscal deficits due to bloated public sector employment and the fiscally irresponsible operation of public enterprises; low average retirement age for Greek workers; high levels of corruption and tax evasion; and most important for the longer run, slow productivity growth.
While most of these consequences worked slowly and were hidden from public scrutiny, the fiscal deficits were not. To finance them, Greek governments forced the Greek Central Bank into buying its bonds and paying for them by printing money. As a result, between 1971 and 1994 inflation averaged 17.7 percent annually. The inflation in turn caused the value of the drachma to fall to about 10 percent of its initial trade weighted average value between 1964 and 1999.
When Greece adopted the Euro in 1999, the inflationary financing of deficits through its central bank ended because the central bank lost its ability to print money. For some years, inexplicably, private sector investors continued to buy Greek bonds without asking for risk premiums commensurate with the unsustainable growth in the public debt. However, the global financial and economic crisis that started in 2008 changed all that. There were predictions that Greece would be unable to sell its bonds and declare bankruptcy.
That was the time when Euro sceptics had their day and the currency was under attack. But instead of resulting in a crumbling of the Euro, the attack produced international commitments to buy Greek bonds under the condition that the government adopt policies that would restore fiscal balance and modify the social democratic policies discussed above.
The beneficiaries of government programs demonstrated and rioted against the implementation of changes that would damage their interests. However, the Greek government had no choice but to make the needed changes and resisted their blandishments. Chances are that politicians welcomed the external pressures for policy changes that they knew were needed but which under normal conditions would have guaranteed electoral defeat. Doing so is perfectly consistent with publicly blaming outside forces for the problems suffered by interest groups.
There is no doubt that the newly adopted policies will benefit all Greeks. The ability to run fiscal deficits will be constrained more than ever before. The resources spent in the past by interest groups lobbying the government for more benefits and regulation will go into productive efforts in the private sector. Inflation will continue to be limited to rates in the rest of Europe.
The Euro system has proven sceptics wrong. Criteria for membership in an optimum currency have turned out to have been endogenous, just as some academics had predicted.
Tuesday, October 5, 2010
The real cost of the Canadian Long Gun Registry
In 1994, when Liberal Minister Allan Rock introduced legislation for the long gun registry, I sat a few feet from him in the House of Commons, serving as a member of the Reform Party caucus. Before question period one day I asked him privately for information that I required to assess the merit of the bill. He promised that he would provide it to me. He never did. Nor was it produced or considered in the public debates the preceded the vote in parliament that decided to continue the gun registry.
The information that I had requested of the Minister was: “What will be the cost per life saved as a result of the existence of the registry?” Knowing this cost does not imply a callous disregard for lives. To the contrary. It allows one to judge whether this cost is higher or lower than that of other ways in which lives could be saved through government spending programs.
The economic issue is clear. Resources used for one deserving cause are not available for other deserving causes. Economic benefit – cost calculations rationally should be used in the evaluation of all proposed government programs.
For example, if it costs $10 million to save one life through the registry but it costs only $5 million to save one life by improvements to road intersections or the provision of better medical equipment in hospitals, an enlightened government should spend that money of the improvement of roads and health services, not on the gun registry. More lives would be served through spending of a given sum of money, a result everyone would welcome.
With the resources available to the federal government, reasonably reliable estimates of such costs and benefits could be made by civil servants and academic specialists. In fact, after I had my conversation with Allan Rock, I asked a colleague in the Criminology Department of Simon Fraser University about the feasibility of such a study. He assured me that it would be possible to do one.
The arguments presented by gun owners on one side and by defenders of the registry like police chiefs on the other, basically are about costs and benefits presented with much emotion but virtually no empirical content.
Gun owners deplore the costs incurred by the government in setting up the registry, the fees they have to pay, the time lost completing registration forms and the inconvenience and cost of meeting the registry’s requirements for the storage and safe keeping of guns.
The police chiefs defend the registry on the grounds that it saves the lives of law enforcement officers, potential victims of crime and domestic violence and that it saves time in responding to emergency calls. Some Canadians argue that the registry prevents a repeat of massacres like the one at Montreal's École Polytechnique in December 1989 that lead to the death of 24 women.
In principle and in the final analysis, the costs borne by the gun owners and the general tax payer can be expressed in terms of dollars with relative ease. The benefits of the registry are more difficult, but not impossible to estimate. Needed is, for example the comparison of the number of police officers and private citizens killed before and after the registry, adjusted for the secular downward trend observed in recent years.
Similarly, it would be possible to estimate the number of innocent people killed by long guns used by emotionally disturbed persons and what effect the registry would have on this number. The needed calculation would be difficult since Montreal-style mass murders are very rare in Canada, but some estimates could be based on comparisons of such incidents in US states and other countries that have and do not have strict long-gun registration systems.
The recent vote in parliament will not make the issue of registry go away. It would be most helpful to all Canadians if future discussions would be based on the kind of information suggested above and lead to voting decisions based on real facts and much less on emotion.
The information that I had requested of the Minister was: “What will be the cost per life saved as a result of the existence of the registry?” Knowing this cost does not imply a callous disregard for lives. To the contrary. It allows one to judge whether this cost is higher or lower than that of other ways in which lives could be saved through government spending programs.
The economic issue is clear. Resources used for one deserving cause are not available for other deserving causes. Economic benefit – cost calculations rationally should be used in the evaluation of all proposed government programs.
For example, if it costs $10 million to save one life through the registry but it costs only $5 million to save one life by improvements to road intersections or the provision of better medical equipment in hospitals, an enlightened government should spend that money of the improvement of roads and health services, not on the gun registry. More lives would be served through spending of a given sum of money, a result everyone would welcome.
With the resources available to the federal government, reasonably reliable estimates of such costs and benefits could be made by civil servants and academic specialists. In fact, after I had my conversation with Allan Rock, I asked a colleague in the Criminology Department of Simon Fraser University about the feasibility of such a study. He assured me that it would be possible to do one.
The arguments presented by gun owners on one side and by defenders of the registry like police chiefs on the other, basically are about costs and benefits presented with much emotion but virtually no empirical content.
Gun owners deplore the costs incurred by the government in setting up the registry, the fees they have to pay, the time lost completing registration forms and the inconvenience and cost of meeting the registry’s requirements for the storage and safe keeping of guns.
The police chiefs defend the registry on the grounds that it saves the lives of law enforcement officers, potential victims of crime and domestic violence and that it saves time in responding to emergency calls. Some Canadians argue that the registry prevents a repeat of massacres like the one at Montreal's École Polytechnique in December 1989 that lead to the death of 24 women.
In principle and in the final analysis, the costs borne by the gun owners and the general tax payer can be expressed in terms of dollars with relative ease. The benefits of the registry are more difficult, but not impossible to estimate. Needed is, for example the comparison of the number of police officers and private citizens killed before and after the registry, adjusted for the secular downward trend observed in recent years.
Similarly, it would be possible to estimate the number of innocent people killed by long guns used by emotionally disturbed persons and what effect the registry would have on this number. The needed calculation would be difficult since Montreal-style mass murders are very rare in Canada, but some estimates could be based on comparisons of such incidents in US states and other countries that have and do not have strict long-gun registration systems.
The recent vote in parliament will not make the issue of registry go away. It would be most helpful to all Canadians if future discussions would be based on the kind of information suggested above and lead to voting decisions based on real facts and much less on emotion.
Thursday, June 3, 2010
COSTLY, NEW REGULATION WILL NOT PREVENT FUTURE FINANCIAL CRISES
The current push by national governments and international organizations for more financial regulation and mandated insurance schemes shows that politicians and bureaucrats have forgotten the dismal history of such policies.
Many studies found that regulation not only imposes high costs of compliance on governments and firms, it also all too often results in government failure that damages the interest of consumers more than did the market failures the regulation was designed to fix. These findings drove the recent, widespread deregulation of the airline, trucking and other industries in the US and around the world.
The most telling evidence concerning the cost of government failure involved a comparison of the prices of tickets for unregulated flights between Los Angeles and San Francisco with those for the equidistant but regulated flights between Boston and Washington. The unregulated, competitively determined ticket prices were one half of those that existed under regulation.
How and why did this happen? The answer is that the regulators were “captured” by the regulated and made decisions that served the regulated industries at the expense of consumers. The capture occurred because the people charged with administering the regulations were chosen on the basis of the specialized knowledge they had acquired as former employees of the regulated industries or because they were advised on current issues by experts in the pay of the regulated industries.
The recent oil-well disaster in the Gulf of Mexico is just another example of such a capture of the regulatory regime by the regulated. It has been blamed on the inadequate enforcement and the modification of regulation of the industry, the most important of which was economic. It limited liabilities of firms that caused the environmental damage, severely reducing the market incentives to take adequate measures to prevent the damages from taking place.
The second problem associated with all regulation is that it results in unintended consequences that often cause new problems. For instance, the punitive taxation of salaries for executives above one million dollars in the United States induced firms to compete for talent by the much increased use of bonuses, which in turn resulted in more policies focused on bonus-paying short-run profits that have been blamed for the misallocation of resources and contributing to the current financial problems.
Another example of unintended consequences of regulations involves banks’ capital requirements based on the riskiness of investments. Banks avoided this regulation by establishing separate corporate entities that housed the management of such risky assets, often just using the same personnel that had carried out the activity in house.
As a result, banks met the regulatory requirements but continued to earn profits from the risky investments through the dividends paid by the companies they owned. The unintended consequence for financial stability was that the operations of these new entities escaped the direct supervision by the banks’ boards of directors and the scrutiny of their stockholders and that their failure contributed much to the depth of the recent crisis.
One of the new types of organizations created by banks and independents were the so-called hedge funds. Their engaged in some highly innovative activities, increased the flow of capital to new ventures and raised the efficiency of capital markets in general. We have long had fire, accident, life and crop insurance. Now we also have bankruptcy insurance serving investors. But these funds and other issuers of new financial derivatives were not covered by regulation and have been seen by many to have contributed to the severity of the recent financial crisis.
The failure of governments to regulate the new hedge funds and derivatives is indicative of their inability to keep up with the development of new financial institutions and practices, which surely will occur again. And that is a good thing, because otherwise financial innovation would come to a halt to the detriment of economic efficiency and growth.
It is tragic that the protection of the public from the systemic problems accompanying the failure of financial institutions will rely on new regulations when there already exists a simple and proven method for dealing with the issues.
When a financial institution cannot meet its obligations, Chapter 11 procedures should be invoked so that it can continue with its normal business activities, while under the supervision of courts, attempts are made to restore fiscal health through refinancing and changes in business practices. If these measures fail, the firm has to declare bankruptcy and arrange for an orderly, legally specified settlement of debts out of remaining assets. This process worked well for firms in the airline business and other industries. There are no fundamental reasons why it would not work for financial institutions.
The second major policy initiative that has followed the recent crisis is the proposal to establish funds to be used for the bailout of failing financial institutions. The big problem with this measure is that it will induce moral hazard behaviour. Just like people with health insurance have increased doctor visits and restaurants that have fire insurance burn more often, so will financial institutions protected from bankruptcy require increased need for financial bailouts.
Mandated government insurance against the failure of financial institutions has the further undesirable consequences of making consumers less vigilant. Knowing that a bank deposit is insured results in less scrutiny of banks by rationally acting depositors. The same outcome is certain, but much more important for the economy once the more complex obligations of financial institutions, like derivatives, are guaranteed by the planned bailout systems.
Moral hazard behaviour can be limited by the use of deductibles and co-insurance. Not all but only a fraction of bank deposits should be insured. Shareholders in banks already bear the main risk of failure but their incentives are blunted by the knowledge that their institutions are “too big to fail” and therefore will be bailed out by governments.
There is one final serious problem with regulation, which stems from the fact that they have to be enforced by fallible humans. The problem is readily seen by considering the parallel between financial regulation and rules governing sports. If the past is any guide, fans at the upcoming World Cup of Soccer in South Africa will be protesting what they consider to be faulty interpretations of the rules of the game by the enforcers of existing rules. One can only hope that the protests will be limited to screaming and will not result in the sort of riots that have taken place in the past.
In this context it is worth noting that Canadian commercial banks have weathered the recent global financial crisis much better than US banks. At a recent conference on what US regulators could learn from this experience, experts agreed that the greater financial stability in Canada was due much more to proper enforcement of existing regulations than to differences in their design and scope.
Another illustration of the crucial role played by enforcers was revealed by the news that the US Security and Exchange Commission had agents on the premises regularly and for extended periods auditing the financial affairs of Bernard Madoff when his Ponzi scheme collapsed and caused untold hardships to many investors.
History is clear. Leaving in place or in many cases restoring the penalties that are dished out by free markets to those who go bankrupt and cause fluctuations will minimize the costs they impose on society much better than more regulations and controls.
Politicians eager to be seen as doing something to prevent future financial crises would be well advised to study the sordid record of regulation. They should learn that some financial and economic fluctuations are inevitable under capitalism, representing a cost that has been repaid many times by the dynamism of free markets and the rise in income and welfare they have produced.
Many studies found that regulation not only imposes high costs of compliance on governments and firms, it also all too often results in government failure that damages the interest of consumers more than did the market failures the regulation was designed to fix. These findings drove the recent, widespread deregulation of the airline, trucking and other industries in the US and around the world.
The most telling evidence concerning the cost of government failure involved a comparison of the prices of tickets for unregulated flights between Los Angeles and San Francisco with those for the equidistant but regulated flights between Boston and Washington. The unregulated, competitively determined ticket prices were one half of those that existed under regulation.
How and why did this happen? The answer is that the regulators were “captured” by the regulated and made decisions that served the regulated industries at the expense of consumers. The capture occurred because the people charged with administering the regulations were chosen on the basis of the specialized knowledge they had acquired as former employees of the regulated industries or because they were advised on current issues by experts in the pay of the regulated industries.
The recent oil-well disaster in the Gulf of Mexico is just another example of such a capture of the regulatory regime by the regulated. It has been blamed on the inadequate enforcement and the modification of regulation of the industry, the most important of which was economic. It limited liabilities of firms that caused the environmental damage, severely reducing the market incentives to take adequate measures to prevent the damages from taking place.
The second problem associated with all regulation is that it results in unintended consequences that often cause new problems. For instance, the punitive taxation of salaries for executives above one million dollars in the United States induced firms to compete for talent by the much increased use of bonuses, which in turn resulted in more policies focused on bonus-paying short-run profits that have been blamed for the misallocation of resources and contributing to the current financial problems.
Another example of unintended consequences of regulations involves banks’ capital requirements based on the riskiness of investments. Banks avoided this regulation by establishing separate corporate entities that housed the management of such risky assets, often just using the same personnel that had carried out the activity in house.
As a result, banks met the regulatory requirements but continued to earn profits from the risky investments through the dividends paid by the companies they owned. The unintended consequence for financial stability was that the operations of these new entities escaped the direct supervision by the banks’ boards of directors and the scrutiny of their stockholders and that their failure contributed much to the depth of the recent crisis.
One of the new types of organizations created by banks and independents were the so-called hedge funds. Their engaged in some highly innovative activities, increased the flow of capital to new ventures and raised the efficiency of capital markets in general. We have long had fire, accident, life and crop insurance. Now we also have bankruptcy insurance serving investors. But these funds and other issuers of new financial derivatives were not covered by regulation and have been seen by many to have contributed to the severity of the recent financial crisis.
The failure of governments to regulate the new hedge funds and derivatives is indicative of their inability to keep up with the development of new financial institutions and practices, which surely will occur again. And that is a good thing, because otherwise financial innovation would come to a halt to the detriment of economic efficiency and growth.
It is tragic that the protection of the public from the systemic problems accompanying the failure of financial institutions will rely on new regulations when there already exists a simple and proven method for dealing with the issues.
When a financial institution cannot meet its obligations, Chapter 11 procedures should be invoked so that it can continue with its normal business activities, while under the supervision of courts, attempts are made to restore fiscal health through refinancing and changes in business practices. If these measures fail, the firm has to declare bankruptcy and arrange for an orderly, legally specified settlement of debts out of remaining assets. This process worked well for firms in the airline business and other industries. There are no fundamental reasons why it would not work for financial institutions.
The second major policy initiative that has followed the recent crisis is the proposal to establish funds to be used for the bailout of failing financial institutions. The big problem with this measure is that it will induce moral hazard behaviour. Just like people with health insurance have increased doctor visits and restaurants that have fire insurance burn more often, so will financial institutions protected from bankruptcy require increased need for financial bailouts.
Mandated government insurance against the failure of financial institutions has the further undesirable consequences of making consumers less vigilant. Knowing that a bank deposit is insured results in less scrutiny of banks by rationally acting depositors. The same outcome is certain, but much more important for the economy once the more complex obligations of financial institutions, like derivatives, are guaranteed by the planned bailout systems.
Moral hazard behaviour can be limited by the use of deductibles and co-insurance. Not all but only a fraction of bank deposits should be insured. Shareholders in banks already bear the main risk of failure but their incentives are blunted by the knowledge that their institutions are “too big to fail” and therefore will be bailed out by governments.
There is one final serious problem with regulation, which stems from the fact that they have to be enforced by fallible humans. The problem is readily seen by considering the parallel between financial regulation and rules governing sports. If the past is any guide, fans at the upcoming World Cup of Soccer in South Africa will be protesting what they consider to be faulty interpretations of the rules of the game by the enforcers of existing rules. One can only hope that the protests will be limited to screaming and will not result in the sort of riots that have taken place in the past.
In this context it is worth noting that Canadian commercial banks have weathered the recent global financial crisis much better than US banks. At a recent conference on what US regulators could learn from this experience, experts agreed that the greater financial stability in Canada was due much more to proper enforcement of existing regulations than to differences in their design and scope.
Another illustration of the crucial role played by enforcers was revealed by the news that the US Security and Exchange Commission had agents on the premises regularly and for extended periods auditing the financial affairs of Bernard Madoff when his Ponzi scheme collapsed and caused untold hardships to many investors.
History is clear. Leaving in place or in many cases restoring the penalties that are dished out by free markets to those who go bankrupt and cause fluctuations will minimize the costs they impose on society much better than more regulations and controls.
Politicians eager to be seen as doing something to prevent future financial crises would be well advised to study the sordid record of regulation. They should learn that some financial and economic fluctuations are inevitable under capitalism, representing a cost that has been repaid many times by the dynamism of free markets and the rise in income and welfare they have produced.
Wednesday, May 5, 2010
Public Sector Unions and Fiscal Deficits
The Canadian Federation of Independent Business (CFIB) in 2008 published a study authored by Ted Mallett and Queenie Wong that compared the incomes of employees in the public and private sectors in Canada.
The results of this study have not been given the attention they deserve at the present time when governments are searching for ways to eliminate large deficits: If the incomes of public sector workers were equal to those in the private sector, fiscal deficits of governments would be lowered by at least $19 billion.
The income advantages enjoyed by public over private sector workers for different types of employers are:
Federal Government 17.3% 41.7%
Post Office 16.9% 40.5%
Urban Transit 12.9% 35.7%
Municipal Government 11.2% 35.9%
Educational Institutions 10.8% 17.6%
Healthcare Institutions 8.5% 19.0%
where the first figure shows the difference in wages and salaries only and the second shows total compensation (wages and salaries plus the value of other forms of compensation like pension contributions, length of work week, holiday and sick-leave provisions).
Source: CFIB analysis of Census 2006 custom tabulation, Wage Watch, December 2008, found at (www.cfib.ca).
It is important to note that these comparisons involve only occupations that have the same responsibilities in both sectors, such as office clerks, accountants, administrative officers and human resource specialists. Excluded are professors, urban transit drivers, fire-fighters, elected government officials and senior government employees such as deputy ministers, since they are not found in the private sector. The data are also adjusted for age to account for the fact the public sector employees on average are older than those in the private sector.
The data in the CFIB study show great variations in these percentages for different provinces and cities but the fact of greatest interest here is the authors’ conclusions that government deficits would have been $19 billion lower if the median wages and benefits in the public had been the same as in the private sector. The data are from the 2006 census, a year in which public sector employment was 20 percent of private sector employment. Because of the growth in public sector employment levels, compensation and general inflation since then, the excess in 2010 would be several billion dollars larger.
To justify any reduction in public sector compensation, it is essential to understand that the existing gap is due entirely to the higher levels of unionization of the public sector and to the disproportionate power the public sector unions have in raising the incomes of their members.
What explains this power of public sector unions? The answer is that public sector workers produce services that are free to the public and that face no competition from the private sector. At the same time, politicians face direct and grave consequences if strikes inconvenience the public while the consequences of covering higher labour costs through increased taxes are relatively minor, especially in a world of economic growth and automatically rising tax revenues.
The merit of policies to reduce public sector incomes must also take into consideration that they are unfair and inconsistent with Canada’s effort to ensure “equal pay for equal work”. Office clerks, accountants and others in occupations compared in this study should be paid the same whether they work in the public or private sector.
The blame for the existing income differences falls fully on politicians, who gave public sector employees the right to strike without making any provisions to prevent the observed, inefficient and unfair outcome. Unions and their members simply and understandably have been taking advantage of the opportunities offered them by the politicians.
What measures would help reduce the existing fiscal deficits and restore equity in the compensation of public and private sector workers? The most obvious measure would be the elimination of public sector unions, which would probably appeal to the vast majority of Canadians who are not members of unions and support the notion that no one has to work for the government if they do not like the absence of unions.
A second-best policy would permit public sector unions to exist but deprive them of the right to strike for higher compensation. Under these conditions, the main function of the unions would be to represent individual workers that have grievances against management. The existence of such an institution would improve the quality of the work environment raise productivity.
The elimination of public sector unions’ right to strike should be accompanied by the adoption of a formula that ties annual increases in public sector wages and compensation to those in the private sector. To eliminate the existing gap, the public sector increases should be a fraction, say 50 percent of private sector increases until the levels in the two sectors are equalized.
Politicians probably are reluctant to accept the preceding proposals because they would face fierce opposition from unionized workers in both sectors, endangering their electoral prospects. However, the effectiveness of such union opposition can be blunted significantly and can even raise electoral prospects if the vast majority of non-unionized Canadians are made aware of the consequences of not doing so: unjustifiable income advantages for a privileged group and higher deficits or taxes for the rest.
The results of this study have not been given the attention they deserve at the present time when governments are searching for ways to eliminate large deficits: If the incomes of public sector workers were equal to those in the private sector, fiscal deficits of governments would be lowered by at least $19 billion.
The income advantages enjoyed by public over private sector workers for different types of employers are:
Federal Government 17.3% 41.7%
Post Office 16.9% 40.5%
Urban Transit 12.9% 35.7%
Municipal Government 11.2% 35.9%
Educational Institutions 10.8% 17.6%
Healthcare Institutions 8.5% 19.0%
where the first figure shows the difference in wages and salaries only and the second shows total compensation (wages and salaries plus the value of other forms of compensation like pension contributions, length of work week, holiday and sick-leave provisions).
Source: CFIB analysis of Census 2006 custom tabulation, Wage Watch, December 2008, found at (www.cfib.ca).
It is important to note that these comparisons involve only occupations that have the same responsibilities in both sectors, such as office clerks, accountants, administrative officers and human resource specialists. Excluded are professors, urban transit drivers, fire-fighters, elected government officials and senior government employees such as deputy ministers, since they are not found in the private sector. The data are also adjusted for age to account for the fact the public sector employees on average are older than those in the private sector.
The data in the CFIB study show great variations in these percentages for different provinces and cities but the fact of greatest interest here is the authors’ conclusions that government deficits would have been $19 billion lower if the median wages and benefits in the public had been the same as in the private sector. The data are from the 2006 census, a year in which public sector employment was 20 percent of private sector employment. Because of the growth in public sector employment levels, compensation and general inflation since then, the excess in 2010 would be several billion dollars larger.
To justify any reduction in public sector compensation, it is essential to understand that the existing gap is due entirely to the higher levels of unionization of the public sector and to the disproportionate power the public sector unions have in raising the incomes of their members.
What explains this power of public sector unions? The answer is that public sector workers produce services that are free to the public and that face no competition from the private sector. At the same time, politicians face direct and grave consequences if strikes inconvenience the public while the consequences of covering higher labour costs through increased taxes are relatively minor, especially in a world of economic growth and automatically rising tax revenues.
The merit of policies to reduce public sector incomes must also take into consideration that they are unfair and inconsistent with Canada’s effort to ensure “equal pay for equal work”. Office clerks, accountants and others in occupations compared in this study should be paid the same whether they work in the public or private sector.
The blame for the existing income differences falls fully on politicians, who gave public sector employees the right to strike without making any provisions to prevent the observed, inefficient and unfair outcome. Unions and their members simply and understandably have been taking advantage of the opportunities offered them by the politicians.
What measures would help reduce the existing fiscal deficits and restore equity in the compensation of public and private sector workers? The most obvious measure would be the elimination of public sector unions, which would probably appeal to the vast majority of Canadians who are not members of unions and support the notion that no one has to work for the government if they do not like the absence of unions.
A second-best policy would permit public sector unions to exist but deprive them of the right to strike for higher compensation. Under these conditions, the main function of the unions would be to represent individual workers that have grievances against management. The existence of such an institution would improve the quality of the work environment raise productivity.
The elimination of public sector unions’ right to strike should be accompanied by the adoption of a formula that ties annual increases in public sector wages and compensation to those in the private sector. To eliminate the existing gap, the public sector increases should be a fraction, say 50 percent of private sector increases until the levels in the two sectors are equalized.
Politicians probably are reluctant to accept the preceding proposals because they would face fierce opposition from unionized workers in both sectors, endangering their electoral prospects. However, the effectiveness of such union opposition can be blunted significantly and can even raise electoral prospects if the vast majority of non-unionized Canadians are made aware of the consequences of not doing so: unjustifiable income advantages for a privileged group and higher deficits or taxes for the rest.
Wednesday, April 28, 2010
Reducing Canada's Deficits by Reducing Immigration
There are no ways to eliminate fiscal deficits that are easy on Canadians and good for politicians. The availability of social program benefits is considered to be a right and woe politicians who favour cutting them. Spending that serves special interests cannot be cut without incurring the wrath of its beneficiaries. Canadians hate tax increases and politicians know it.
However, there is a simple way to balance budgets and avoid all of these problems: reduce significantly the level of immigration. Foreigners do not vote in Canadian elections.
Reduced immigration reduces fiscal imbalances because Canada’s welfare state provides social benefits to immigrants worth much more than what they pay in taxes. The costs do not show up in any official budgets, but they are large and will grow as more immigrants are admitted.
The costs stem from the fact that immigrants and their families receive on average the same government benefits as other Canadians – education for their children, health-care, employment insurance and welfare benefits. In addition, immigrant families are provided with special services to help them integrate into Canadian society and the economy – language instruction, settlement and legal advice and housing subsidies.
These costs are offset to some extent by the taxes paid by immigrants. The problem is that they pay considerably less than Canadians for two main reasons. First, Canada’s personal income tax system is very progressive. The top ten percent of all income tax filers pay about one half of all taxes while the bottom half of filers pay only about 5 percent. Second, recent immigrants after arrival have much lower earnings than Canadians: On average their earnings are 65 percent in the first year, rise gradually over the next 9 years to a maximum of 80 percent of the earnings of Canadian workers with similar demographic characteristics.
These two facts imply that few of the recent immigrants are in the top decile, many are in the bottom half of income tax payers and that their asset holdings are relatively small. Using these basic facts, I have estimated that on average immigrants pay 21 percent of the income taxes, only 80 percent of sales and other taxes and even smaller percentages of corporate income and property taxes than do Canadians.
Attaching dollar figures to these percentages implies that immigrants who arrived in 1990, on average in 2000 consumed government services worth $6,300 more than they paid in taxes; the 216,000 immigrants who arrived in 1990 generated a net transfer of $1.36 billion in 2000 while all of the immigrants who arrived during the last decade of the century, in the year 2000 generated transfers to themselves worth about $18.3 billion and will do so for in coming years.
The preceding calculations are rough and based on many assumptions, but they are the only ones available. More studies may show that the net costs are higher or lower, but it is clear they exist, are likely to be substantial and will continue to persist and grow if present immigration policies are continued.
But will immigrants not bring benefits to Canadians that match or even exceed these fiscal costs? Consider the following types of alleged benefits.
First, the economy benefits as immigrants fill jobs that other Canadians do not want or are not trained for. The problem is that these immigrants lower the wages of other Canadians competing with them and cause poverty levels to be higher than they would be otherwise and requiring more spending on anti-poverty programs.
Most fundamentally, in the absence of immigrants, there would be no long-lasting labour or skills shortages because wages on presently undesirable jobs would rise until they are filled by Canadians; higher wages for skilled workers would encourage more Canadians to get the needed education and training; and employers would invest more capital to raise labour productivity, which would allow them to maintain profits while paying workers the higher wages.
Second, many people believe that immigrants provide an easy solution to the looming crisis of unfunded liabilities for public health care and pension programs. Simulations using official estimates of population dynamics show that to maintain the present ratio of retired to working people in Canada in the year 2050 alone would require 7 million immigrants and a population level of 165 million. Canada could not absorb immigrants in such large numbers and might well not be able to recruit them. There are much less costly methods for defusing the pending crisis of unfunded liabilities, such as increasing the age of retirement.
Third, immigrants are believed to generate economies of scale that lower the average cost of infrastructure like roads and municipal services for all Canadians. This benefit from immigration existed in the past. In recent years and in the future, immigrants add significantly to congestion, pollution and the prices of scarce land and housing.
The magnitude of these problems is not widely recognized but may be gleaned from the fact that currently immigrant families arriving in the BC Lower Mainland every week of the year need 200 new housing units that require electricity, water and sewers. These families send children to school, put cars on the road and use public transit. It is ironic that meeting these needs of immigrants results in labour shortages that in turn are used to justify further immigration.
Finally, some Canadians believe immigration should continue in the spirit of the country’s proud tradition of helping poor and oppressed people find a land of opportunity. This feel-good benefit of immigration cannot be measured, but should rationally be compared to the costs it brings. The estimate above suggests that this benefit is very expensive indeed.
The possible reduction of immigration levels to balance the budget in the future is not discussed publicly by politicians, who fear the resultant loss of immigrant votes. But these politicians should consider whether the loss is as great as is commonly assumed since recent immigrants in surveys often express the view that immigration should be reduced. They should also ponder whether the loss of immigrant votes really is greater than the loss of votes due to spending cuts and tax increases that are mandated by the present fiscal imbalances.
However, there is a simple way to balance budgets and avoid all of these problems: reduce significantly the level of immigration. Foreigners do not vote in Canadian elections.
Reduced immigration reduces fiscal imbalances because Canada’s welfare state provides social benefits to immigrants worth much more than what they pay in taxes. The costs do not show up in any official budgets, but they are large and will grow as more immigrants are admitted.
The costs stem from the fact that immigrants and their families receive on average the same government benefits as other Canadians – education for their children, health-care, employment insurance and welfare benefits. In addition, immigrant families are provided with special services to help them integrate into Canadian society and the economy – language instruction, settlement and legal advice and housing subsidies.
These costs are offset to some extent by the taxes paid by immigrants. The problem is that they pay considerably less than Canadians for two main reasons. First, Canada’s personal income tax system is very progressive. The top ten percent of all income tax filers pay about one half of all taxes while the bottom half of filers pay only about 5 percent. Second, recent immigrants after arrival have much lower earnings than Canadians: On average their earnings are 65 percent in the first year, rise gradually over the next 9 years to a maximum of 80 percent of the earnings of Canadian workers with similar demographic characteristics.
These two facts imply that few of the recent immigrants are in the top decile, many are in the bottom half of income tax payers and that their asset holdings are relatively small. Using these basic facts, I have estimated that on average immigrants pay 21 percent of the income taxes, only 80 percent of sales and other taxes and even smaller percentages of corporate income and property taxes than do Canadians.
Attaching dollar figures to these percentages implies that immigrants who arrived in 1990, on average in 2000 consumed government services worth $6,300 more than they paid in taxes; the 216,000 immigrants who arrived in 1990 generated a net transfer of $1.36 billion in 2000 while all of the immigrants who arrived during the last decade of the century, in the year 2000 generated transfers to themselves worth about $18.3 billion and will do so for in coming years.
The preceding calculations are rough and based on many assumptions, but they are the only ones available. More studies may show that the net costs are higher or lower, but it is clear they exist, are likely to be substantial and will continue to persist and grow if present immigration policies are continued.
But will immigrants not bring benefits to Canadians that match or even exceed these fiscal costs? Consider the following types of alleged benefits.
First, the economy benefits as immigrants fill jobs that other Canadians do not want or are not trained for. The problem is that these immigrants lower the wages of other Canadians competing with them and cause poverty levels to be higher than they would be otherwise and requiring more spending on anti-poverty programs.
Most fundamentally, in the absence of immigrants, there would be no long-lasting labour or skills shortages because wages on presently undesirable jobs would rise until they are filled by Canadians; higher wages for skilled workers would encourage more Canadians to get the needed education and training; and employers would invest more capital to raise labour productivity, which would allow them to maintain profits while paying workers the higher wages.
Second, many people believe that immigrants provide an easy solution to the looming crisis of unfunded liabilities for public health care and pension programs. Simulations using official estimates of population dynamics show that to maintain the present ratio of retired to working people in Canada in the year 2050 alone would require 7 million immigrants and a population level of 165 million. Canada could not absorb immigrants in such large numbers and might well not be able to recruit them. There are much less costly methods for defusing the pending crisis of unfunded liabilities, such as increasing the age of retirement.
Third, immigrants are believed to generate economies of scale that lower the average cost of infrastructure like roads and municipal services for all Canadians. This benefit from immigration existed in the past. In recent years and in the future, immigrants add significantly to congestion, pollution and the prices of scarce land and housing.
The magnitude of these problems is not widely recognized but may be gleaned from the fact that currently immigrant families arriving in the BC Lower Mainland every week of the year need 200 new housing units that require electricity, water and sewers. These families send children to school, put cars on the road and use public transit. It is ironic that meeting these needs of immigrants results in labour shortages that in turn are used to justify further immigration.
Finally, some Canadians believe immigration should continue in the spirit of the country’s proud tradition of helping poor and oppressed people find a land of opportunity. This feel-good benefit of immigration cannot be measured, but should rationally be compared to the costs it brings. The estimate above suggests that this benefit is very expensive indeed.
The possible reduction of immigration levels to balance the budget in the future is not discussed publicly by politicians, who fear the resultant loss of immigrant votes. But these politicians should consider whether the loss is as great as is commonly assumed since recent immigrants in surveys often express the view that immigration should be reduced. They should also ponder whether the loss of immigrant votes really is greater than the loss of votes due to spending cuts and tax increases that are mandated by the present fiscal imbalances.
Tuesday, April 13, 2010
The Trouble with Climate Model Forecasts
In the light of recent developments, it is surprising that there have been no revelations from insiders about the misuse of sophisticated computer models, which have played a pivotal role in the International Panel on Climate Change’s dire forecasts of catastrophic climate changes. The truth is that while some aspects of these models involve objective science, they also rely heavily on personal judgments so that their results “prove” nothing and it is foolish to use them as a justification for any policies.
The problems associated with climate models are illustrated by the recent response of a government meteorologist to a request for a forecast of the temperature during the week leading up to the Olympic Winter games in Vancouver. The answer was “It depends on what forecasting models you look at. Some are predicting continued warm, some cooler weather.”
There a several reasons for problems with complex computer models.
First, they consist of large numbers of equations that mirror relationships between variables like land and ocean temperatures at different latitudes, greenhouse gas levels, cloud covers, seasonal variations in sun intensity, periodic changes in ocean currents and many others. The equations involve feedbacks, lags and interdependencies among the variables that result in complexities that the human mind cannot track directly and which are the main justification for the use of ever speedier and larger computers.
Second, many of the equations, the interrelationships and the lags are based on imperfect empirical information. Some of this information is biased through manipulations of the sort revealed by the emails among the staff of IPCC. Many of the parameters of the equations and forecasts of levels and rates of change are assumed rather than based on scientifically rigorous projections.
Third, the number of variables affecting the global climate and found in the equations and interrelationships is extremely large, if not infinite. Modellers can use only a limited, albeit growing number of them, employing personal judgments rather than scientific criteria in the selection.
Fourth, some of the influences on the earth’s climate are random, like volcanic eruptions, fluctuations in atmospheric ozone levels and cosmic radiation from the sun and other celestial bodies. It is obvious that they cannot be incorporated systematically in the models and can easily invalidate all estimates based on more predictable relationships.
Because of these and some other problems associated with the construction and use of complex climate change models, the results are highly uncertain and can easily be manipulated to serve ulterior objectives, as is suggested by Lowell Wood, a distinguished scientist who is intimately familiar with these models. In an interview with Stephen Levitt and Stephen Dubner, the authors of the book Super Freakonomics, he said “Everybody turns their knobs so they aren’t the outlier, because the outlying model is going to have difficulty getting funded.” By “turning their knobs” he means adjusting models until they are in a range consistent with what the financial sponsors of the work expect.
In this context it is worth noting a close similarity between economic and climate forecasting models. During the 1960s, the economic models were expected to become increasingly reliable instruments for forecasting inflation, economic growth, unemployment and other measures of economic well being, using ever more equations, variables, estimating techniques and powerful computers. Lawrence Klein, one of the pioneers in the development of these forecasting models was honoured with a Nobel Prize.
We now know that in spite of expensive efforts to perfect these models, they are of very limited use. The forecasts they generate are routinely adjusted through ad hoc changes until they are consistent with intuitive outcomes. Canada’s Department of Finance was accused of manipulating the results of its models to justify politically motivated fiscal budgets, which prompted the new Finance Minister Paul Martin in 1994to use the average of private economic forecasts as a base for his budget. The differences in these forecasts are themselves evidence of the subjectivity involved in the construction of the models on which they are based.
It is about time to treat both economic and climate change models with equal degrees of scepticism and that their authors admit to the use of ad hoc adjustments to produce outcomes that are consistent with the expectations of their sponsors. The scientists producing these models owe humanity this much as their work serves as the justification for global climate change policies that may well be more expensive than any global collective effort in history.
The problems associated with climate models are illustrated by the recent response of a government meteorologist to a request for a forecast of the temperature during the week leading up to the Olympic Winter games in Vancouver. The answer was “It depends on what forecasting models you look at. Some are predicting continued warm, some cooler weather.”
There a several reasons for problems with complex computer models.
First, they consist of large numbers of equations that mirror relationships between variables like land and ocean temperatures at different latitudes, greenhouse gas levels, cloud covers, seasonal variations in sun intensity, periodic changes in ocean currents and many others. The equations involve feedbacks, lags and interdependencies among the variables that result in complexities that the human mind cannot track directly and which are the main justification for the use of ever speedier and larger computers.
Second, many of the equations, the interrelationships and the lags are based on imperfect empirical information. Some of this information is biased through manipulations of the sort revealed by the emails among the staff of IPCC. Many of the parameters of the equations and forecasts of levels and rates of change are assumed rather than based on scientifically rigorous projections.
Third, the number of variables affecting the global climate and found in the equations and interrelationships is extremely large, if not infinite. Modellers can use only a limited, albeit growing number of them, employing personal judgments rather than scientific criteria in the selection.
Fourth, some of the influences on the earth’s climate are random, like volcanic eruptions, fluctuations in atmospheric ozone levels and cosmic radiation from the sun and other celestial bodies. It is obvious that they cannot be incorporated systematically in the models and can easily invalidate all estimates based on more predictable relationships.
Because of these and some other problems associated with the construction and use of complex climate change models, the results are highly uncertain and can easily be manipulated to serve ulterior objectives, as is suggested by Lowell Wood, a distinguished scientist who is intimately familiar with these models. In an interview with Stephen Levitt and Stephen Dubner, the authors of the book Super Freakonomics, he said “Everybody turns their knobs so they aren’t the outlier, because the outlying model is going to have difficulty getting funded.” By “turning their knobs” he means adjusting models until they are in a range consistent with what the financial sponsors of the work expect.
In this context it is worth noting a close similarity between economic and climate forecasting models. During the 1960s, the economic models were expected to become increasingly reliable instruments for forecasting inflation, economic growth, unemployment and other measures of economic well being, using ever more equations, variables, estimating techniques and powerful computers. Lawrence Klein, one of the pioneers in the development of these forecasting models was honoured with a Nobel Prize.
We now know that in spite of expensive efforts to perfect these models, they are of very limited use. The forecasts they generate are routinely adjusted through ad hoc changes until they are consistent with intuitive outcomes. Canada’s Department of Finance was accused of manipulating the results of its models to justify politically motivated fiscal budgets, which prompted the new Finance Minister Paul Martin in 1994to use the average of private economic forecasts as a base for his budget. The differences in these forecasts are themselves evidence of the subjectivity involved in the construction of the models on which they are based.
It is about time to treat both economic and climate change models with equal degrees of scepticism and that their authors admit to the use of ad hoc adjustments to produce outcomes that are consistent with the expectations of their sponsors. The scientists producing these models owe humanity this much as their work serves as the justification for global climate change policies that may well be more expensive than any global collective effort in history.
Tuesday, March 16, 2010
The Burden of the Canada Post Monopoly
Canada Post is a dinosaur that has lived far too long. Only a monopoly protected by government can treat the public the way it does. The cost of stamps for a first class letter on January 11 went from 54 to 57 cents, for an increase in 5.5 percent over a year in which consumer prices rose only half that rate. Since 1971, when a stamp cost 7 cents, the cost of mailing a letter has jumped by 714 percent while general inflation was only 443 percent.
Such increases in the cost of postal services could perhaps be justified if the quality of the service increased correspondingly. But my own experiences suggest that the opposite is the case. The first concerns Purolator, a subsidiary of Canada Post. In the middle of December upon returning from a business trip I learned from a telephone message that I had to pick up a package at the local Purolator office by the next day. If I did not do so, the package would be returned to the sender. The package contained tickets for Olympic events, which Purolator had known long in advance would be sent to many people in Canada at that time.
When I arrived at the Purolator office the next morning shortly after it had opened at 8:30, a dozen people were already lined up in front of me, waiting to be served by one clerk. Within a short time, another half dozen people joined the queue. I estimated that it would take customers on average 30 minutes to be served by the single employee behind the counter. Asked about more help, the employee responded that another person would arrive “Within the next half hour.” Sure enough, around 9:15 a second customer service agent leisurely walked into the office. She held a copy of coffee in her hand and disappeared for several minutes into another room before starting to serve customers.
My second experience involved the Canada Post delivery system: A Christmas letter arrived on January 11, after it had been mailed in New York on December 9. The letter had been returned to the sender because the address on the envelope had been imperfect. It gave the correct name, street address, town and postal code but it gave the wrong apartment number, 2102 instead of 1202. The mail carrier obviously could not be bothered to search for the correct mail box, at which on average I receive 3 pieces of mail a day. Instead, he or she made a big cross on the envelope and wrote in bold letters “NO SUCH”, leaving open the question whether there is no such person, street address, town or apartment.
A final personal experience involved the shipment of books to a university in Italy where I needed them for courses I was teaching in the Spring of 2008. Canada Post charged $250 and the books arrived after 2.5 months. The same books shipped back to Canada later that year cost $40 and arrived after three weeks. It is puzzling that the cost and time were so much better when my primary dealings were with the Italian rather than the Canadian postal services.
Canada Post publicly justifies its record of price increases by reference to a decrease in the volume of business, the cost of mechanization and the need to serve more customers. No one really knows whether this explanation is valid. Its operation and accounting are simply too complex.
However, we do know from history that when governments remove the protection of monopolies, costs drop and consumers are serviced better. There are many reasons for this result, but again history shows that the end of the monopoly is accompanied by the loss of power by unions to extract high levels of compensation, protect employees from the consequences of poor performance and prevent the introduction of new labour-saving technology. Management also becomes more efficient and willing to resist union demands because government policies no longer permit higher costs and poor service to be passed on to consumers.
The argument that monopoly protection is needed so that Canada Post can subsidize the services to customers living in remote areas is bogus. After airline deregulation, remote and small communities were serviced better and more cheaply by unregulated airlines. If subsidies for some remote locations are still needed, government should pay them directly to private providers of first class mail services who won the contract in a competitive bid.
Canadians have the right to buy their goods and services from any supplier who offers them the best price and service. The government has no right to force Canadians into buying first class mail services from the monopoly Canada Post. It is time for genuine competition in this market.
Such increases in the cost of postal services could perhaps be justified if the quality of the service increased correspondingly. But my own experiences suggest that the opposite is the case. The first concerns Purolator, a subsidiary of Canada Post. In the middle of December upon returning from a business trip I learned from a telephone message that I had to pick up a package at the local Purolator office by the next day. If I did not do so, the package would be returned to the sender. The package contained tickets for Olympic events, which Purolator had known long in advance would be sent to many people in Canada at that time.
When I arrived at the Purolator office the next morning shortly after it had opened at 8:30, a dozen people were already lined up in front of me, waiting to be served by one clerk. Within a short time, another half dozen people joined the queue. I estimated that it would take customers on average 30 minutes to be served by the single employee behind the counter. Asked about more help, the employee responded that another person would arrive “Within the next half hour.” Sure enough, around 9:15 a second customer service agent leisurely walked into the office. She held a copy of coffee in her hand and disappeared for several minutes into another room before starting to serve customers.
My second experience involved the Canada Post delivery system: A Christmas letter arrived on January 11, after it had been mailed in New York on December 9. The letter had been returned to the sender because the address on the envelope had been imperfect. It gave the correct name, street address, town and postal code but it gave the wrong apartment number, 2102 instead of 1202. The mail carrier obviously could not be bothered to search for the correct mail box, at which on average I receive 3 pieces of mail a day. Instead, he or she made a big cross on the envelope and wrote in bold letters “NO SUCH”, leaving open the question whether there is no such person, street address, town or apartment.
A final personal experience involved the shipment of books to a university in Italy where I needed them for courses I was teaching in the Spring of 2008. Canada Post charged $250 and the books arrived after 2.5 months. The same books shipped back to Canada later that year cost $40 and arrived after three weeks. It is puzzling that the cost and time were so much better when my primary dealings were with the Italian rather than the Canadian postal services.
Canada Post publicly justifies its record of price increases by reference to a decrease in the volume of business, the cost of mechanization and the need to serve more customers. No one really knows whether this explanation is valid. Its operation and accounting are simply too complex.
However, we do know from history that when governments remove the protection of monopolies, costs drop and consumers are serviced better. There are many reasons for this result, but again history shows that the end of the monopoly is accompanied by the loss of power by unions to extract high levels of compensation, protect employees from the consequences of poor performance and prevent the introduction of new labour-saving technology. Management also becomes more efficient and willing to resist union demands because government policies no longer permit higher costs and poor service to be passed on to consumers.
The argument that monopoly protection is needed so that Canada Post can subsidize the services to customers living in remote areas is bogus. After airline deregulation, remote and small communities were serviced better and more cheaply by unregulated airlines. If subsidies for some remote locations are still needed, government should pay them directly to private providers of first class mail services who won the contract in a competitive bid.
Canadians have the right to buy their goods and services from any supplier who offers them the best price and service. The government has no right to force Canadians into buying first class mail services from the monopoly Canada Post. It is time for genuine competition in this market.
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