CANADA NEEDS PRIVATE HEALTH CARE

 

Canada’s health care system is one of the costliest and most poorly performing of all the universal public health care systems in the Western democracies. Now, according to Alika Lafontaine, head of the Canadian Medical Association (CMA) it is on the verge of collapse.

Indications of collapse abound. Millions of Canadians cannot find a family doctor, wait lists for specialists are at record lengths, access to diagnostic equipment is severely limited and the emergency departments of hospitals are sometimes closed.

What can be done to improve the system’s performance and prevent an even bigger collapse? The CMA says: “It’s time to stop pouring money into a broken health system and invest in a new one.” In answering a question in Parliament about health care, even Justin Trudeau said, “We can’t just throw money at it.”

The most recent federal proposal for improving the system is “creation of a countrywide health database, which would track health outcomes based on a set of common indicators.” For its part, British Columbia’s government has announced reforms to relieve the shortage of family doctors and end chaos in health care by paying doctors “on the basis of time spent with patients, the number of patients seen in a day, the number of patients attached to their practice, the complexity of the patient’s issues, and their office overhead costs.” 

These responses and others like them are totally inadequate. Whatever operational improvements they may provide will be accompanied by significant administrative costs both for governments and for doctors, who will have to take more and more time to fill out more and more forms. 

Since the creation of Medicare in 1966 many changes like those recently proposed have taken place. They obviously have not prevented the present chaos. The fundamental reason is that the system is planned and operated by the government. As Milton Friedman put it: “If you put the federal government in charge of the Sahara Desert, in five years there’d be a shortage of sand.”   

What would happen if instead Canada’s health care system relied on free markets rather than government planning? There would be no more doctor shortages, waitlists or limited access to diagnostic facilities and hospitals. Doctors, hospitals, nurses and others would provide the best services they could, using the best technology, to attract patients to their practices. As they always do in a market system, prices would adjust to make that happen. Competition would limit providers’ profits, just as it limits the profits of bakers who serve customers without shortages and with better quality and greater variety of baked goods every passing year.

Many Canadians would oppose the adoption of such a free-market system over concerns that their and their families’ future medical problems could impose large costs on them. In a free market, insurance companies would provide the opportunity to allay these concerns through the purchase of insurance.

The total amount of money raised through insurance premiums would have to cover the cost of the services provided by the industry. But because of market competition this amount would be lower than the current tax-financed system requires. Canadians would get health care by paying providers and insurers of their choice rather than paying taxes to the government.

Poor Canadians might not be able to afford such premiums. The government could help them using general welfare programs. A more targeted approach would be to create a publicly owned non-profit insurance company authorized to provide health insurance for the poor. The funds needed for this would come from taxes, which fall heavily on higher-income Canadians so that the current income equalization efforts would continue. A publicly owned company along these lines exists in Germany. It competes with private companies and charges premiums, which private companies obviously cannot exceed if they want to stay in business.  

Private insurance companies would compete with the public company by providing better services, especially by offering premiums at different rates depending on the chosen level of co-payments, that is the amount the insured person pays for each doctor visit or treatment. Such co-payments reduce the demand for health care for the benefit of all users, just as co-payments on car insurance do.

The Canadian health care system is collapsing and cannot be saved by more money or merely marginal changes in operation and data collection. Fundamental reform is needed and the return to free markets is the best alternative. 

Herbert Grubel, professor emeritus of economics at Simon Fraser University, is a senior fellow at the Fraser Institute.

This editorial has been published in the Financial Post on December 9, 2022 https://financialpost.com/opinion/canada-private-health-care

ROBINSON, FRIDAY AND ALEXANDRIA – A FABLE

 

ROBINSON, FRIDAY AND ALEXANDRIA – A FABLE

(About the Effects of Income Equalization)

Herbert Grubel, Emeritus Professor of Economics, Simon Fraser University

After Robinson was shipwrecked on a deserted island, he fished the local reef and collected wild corn in the forest to feed himself well enough to survive and be content with his fate.

When Friday was shipwrecked and joined him on the island, he and Robinson initially fished and collected corn together and shared the bounty equally. However, after a while it became clear that Robinson was relatively better at fishing and Friday was relatively better at collecting corn. So, they decided that Robinson would do all the fishing and Friday all the collecting.

Once a week they got together and traded fish for corn. Most often the ratio was one fish for 10 ears of corn, but sometimes it was 1/5 or 1/20 when uncommon weather interfered with harvesting. Whatever the ratio, both Robinson and Friday were satisfied since they agreed freely on the ratio of the day.

Both men built their own shelter. Robinson devoted much of his free time and energy to build and maintain a strong and comfortable home. Friday spent little of his free time on building a shelter, preferring to pursue his passions of watching birds and writing poems. His shelter turned out much less secure and comfortable than Robinson’s. Both men were happy with the way they arranged their lives.

Then one day a woman named Alexandria was shipwrecked on the island. She was a professor at a university located on another island in the archipelago. She had been in a small boat not too distant from that island admiring the sunset when a sudden storm pushed her boat into the open ocean and after a day at sea, she shipwrecked on Robinson’s Island.

The two residents of the island gave her food and she moved into Friday’s shelter. In return for these benefits, she used her university background and taught them how to increase their productivity. Robinson constructed a fish farm and Friday applied scientific farming methods.

The changes increased the supply of fish and corn and a higher standard of living for all. The three lived in happy harmony, enjoying their personal freedoms while cooperating on the important production of food.

One day a very heavy storm hit the island. It flooded Friday’s somewhat flimsy shelter and made life miserable for him and Alexandria. When they visited Robinson, they found him dry and content in his well-built shelter. 

After that visit Alexandria remembered what she had learned from her university colleagues. It was unfair that Robinson had a better shelter than the one in which she and Friday lived. This thought brought Alexandria and Friday to visit Robinson where they argued that he had the moral obligation to share his superior material wealth with them. He reluctantly agreed and allowed them to take away the building material he had stored for future repairs of his shelter - without getting any corn in return. He did so for the sake of peace and harmony on the island.

Some time later, Alexandria remembered another lesson she learned at the university. Ratios for the exchange of fish and corn in the market were determined without proper regard for their effect on the distribution of income. After some careful soul-searching she concluded that recent ratios had led to an unfair distribution of income and that as a woman she was in greater need than the men.

To correct this problem, she and Friday again visited Robinson, this time arguing that he was morally and for the sake of peace and harmony obligated to accept a different way of determining the ratio at which fish and corn were exchanged. It would henceforth be decided after a vote among the three of them.

Robinson had no choice but to accept this new way of setting the ratio. Alexandria and Friday were in the majority and had the means to make life miserable for him if he did not accept their decisions. As time went by, Alexandria and Friday adjusted the ratio occasionally to create a fairer distribution of income.

As a result of this new method for deciding the amount of corn Robinson received for his fish, his living standard fell substantially. He resented this fact deeply and withdrew from all unnecessary contacts with Friday and Alexandria, became depressed, lost his zest for life and caught ever fewer fish.  

Alexandria and Friday did not know how to fish. Their backgrounds as professors and poets did not prepare them for the job. Living standards for all three on the island continued to decrease but while Robinson was depressed, the spirits of the other​​ were high because they knew that no-one else had a higher income than they.

The end of life on Robinson’s Island is lost in the fog of history. What could have happened to the habitants is:

·        They lived happily and in harmony with subsistence levels of income until they died from old age.

·        The meager diet caused them to lose physical and mental strength, which made them die in a battle with invaders from another island.

·        Robinson, while still well-nourished and strong, killed Friday and Alexandria in revenge for their unfair treatment. He died of old age.

Note: Alexandria is a caricature of Alexandria Ocasio-Cortez, the Member of Congress from New York. Her firebrand communist rhetoric has made her a darling of the woke media.

 

 

 

 

 

 

 

Opinion: Anti-inflation policy is all about the money

 

When the current inflation began the Bank of Canada assured the public it was caused by the pandemic’s temporary disruption of supply chains and would not last. But the price increases persisted and the Bank changed its mind and has begun raising interest rates to reduce the demand for goods, services, and assets and try to prevent a dreaded wage-price spiral. That the Ukraine war has disturbed key markets has not helped.

In contrast, the academic economists known as monetarists have insisted from the start that the inflation was due, not to temporary disruptions in supply or to international tensions, but rather to an excess supply of money the Bank of Canada itself created. This view is based on Milton Friedman’s conclusion, after studying past inflations around the world, that “Monetary policy is not about interest rates; it is about the growth of the (broad) quantity of money.” Combatting inflation requires adjustments to the money supply, not changes in interest rates.

Canada’s money supply, as measured by “M3,” grew by 32 per cent (from $2.5 trillion to $3.3 trillion) between the second quarters of 2019 and 2022. During the same period the country’s GDP increased 22 per cent. If the Bank had kept the ratio of money to GDP constant, the money supply would have increased 22 per cent or $0.6 trillion, not 32 per cent or $0.8 trillion, which implies the excess money supply held by the Canadian public in 2022 was some $200 billion.

Since this extra $200 billion was more than Canadians needed to carry out their financial affairs, they disposed of it by spending it on goods, services and assets. But all this new demand was not accompanied by an equivalent increase of production, which is what would have happened under normal conditions when Canadians earned money in return for producing goods and services. In fact, the Bank of Canada created this excess money supply with the stroke of a pen. The result — “more money chasing the same amount of goods” — led to inflation.

It’s probably counter-intuitive and it’s certainly ironic that spending by some Canadians to lower their money holdings does not decrease the overall money supply. The reason is that the money that sellers of the goods, services and assets receive becomes their own excess money holdings. When they in turn spend it, the surplus money is shifted to another set of sellers — and so on and so on in a vicious cycle. It is like a hot potato no one wants to hold that is passed around the room from person to person. In the end, the excess money supply is eliminated only when inflation reduces its real value or central bank operations soak it up directly.

The Bank of Canada created the excess supply mostly in the second quarter of 2020, when M3 grew eight per cent, four times its normal growth of about two per cent. Why did it do that? To provide the federal government with the money it needed to bring financial relief to needy Canadians affected by the pandemic. That burst of government spending was justifiable on moral grounds. What was not justifiable was the Bank’s failure to reduce the money supply to non-inflationary levels after the emergency relief payments were no longer needed.

While some Canadians spent the excess money, others have been using it to finance a period of leisure. Their withdrawal from the labour force helps explains why there is the shortage of labour that has led to higher wages, inflation and the beginnings of a wage-price spiral.

Monetarists believe another important problem confronts the Bank of Canada. It can only set nominal rates of interest. But borrowing and spending are determined by real rates. If expected inflation is eight per cent, an apparently high nominal rate of interest of six per cent in fact becomes a real rate of minus two per cent. You could borrow $100 at six per cent, buy an asset, sell it a year later for $108, repay the $100 loan, pay the $6 interest due and enjoy a net profit of $2. When real interest rates are negative borrowing always pays and lending becomes a mug’s game.

But inflationary expectations are not observable. So the Bank does not know what real rate is implied by the nominal rate it sets. Operating in the dark in this way can lead it to set nominal rates too low, which unintentionally creates inflationary increases in demand, or too high, which risks unnecessarily large reductions in demand and a recession.

Canadians can only hope the Bank of Canada’s interest rate policies will get inflation under control promptly, despite the problems identified by monetarists. If not, we are in for a deeper recession, higher unemployment and lower economic growth than necessary.

Herbert Grubel is an emeritus professor of economics at Simon Fraser University and a senior fellow at the Fraser Institute.

Published in the Financial Post, Oct 20, 2022  

 

To understand and forecast inflation, follow the money

 

To understand and forecast inflation, follow the money

Former Bank of Canada Governor John Crow was once asked whether the money supply had been used in the Bank’s economic model and forecasts he had just presented. His response was that although money was not in the model he regularly looked over his shoulder to be sure the money supply was not growing too quickly. During his time in office, both the money supply and prices grew at satisfactorily moderate rates.

Current Governor Tiff Macklem should have spent more time looking over his shoulder. In the first year of the COVID epidemic the money supply, as measured by “M3,” increased at an average annual rate of 13.4 per cent, almost double the rate during the preceding nine years. Even so, most academic economists and advisers to central bankers have blamed the current inflation — 8.1 per cent year-on-year in June — on disruptions in the global supply chain, COVID after-effects, the war in Ukraine but not excess money creation. In the press conference last month at which he announced a hike in the Bank’s target interest rate of 100 basis points, Governor Macklem did not mention the money supply once. Nor was the issue raised during later media interviews.

 

But money is crucial to inflation. In the words of Milton Friedman: “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” History shows that inflation follows excessive growth in the money supply with a lag, usually about two years.

Events like harvest failures, epidemics, floods, earthquakes, and wars do of course reduce supply and increase the prices of goods and services affected by these abnormal events. But these price increases disappear once normal conditions return. If they were to persist, consumers spending more on the higher-priced goods would have less income to spend on other goods, whose prices would fall correspondingly, leaving the average of all prices unchanged. Inflation, a persistent increase in the overall price level, can therefore only occur if increases in the money supply precede or accompany these disturbances.

What causes the money supply to increase? The first way involves commercial banks extending loans to private borrowers, granting them a corresponding amount of new current account deposits, which count as money in government statistics. These commercial banks see their assets (the loans to the borrowers) increase by the same amount as their obligations (the new money in the deposit accounts that the banks have created for the borrowers).

A second way the money supply can increase results from actions of the Bank of Canada. During COVID, the bank bought government bonds held by investment institutions. It paid for them by creating new deposits for the sellers. This added directly to the money supply and increased the central bank’s assets and liabilities by the same amount. Known as “Quantitative Easing,” (QE) this policy likely helped keep interest rates low: when a central bank buys bonds that makes things easier for people and firms trying to borrow money.

Both commercial and central banks in effect create money out of thin air. The ability of the commercial bank to do so is constrained by regulations and interest rates set by the central bank, which influence private lending and thus the growth in demand for loans. The Bank of Canada, however, faces no limits on its money creation other than public and political pressures when the economy underperforms or inflation develops.

The total amount of money created by Canada’s commercial banks and the Bank of Canada is known as M3. The share of money created by the Bank of Canada in the decade before COVID was three per cent but soared to 46 per cent in 2020-2022, which implies strongly that expansion of the money supply moved dramatically from the market-determined actions of commercial banks to the politically determined policy of the Bank of Canada.

The two lines in the nearby graph show six-month moving averages of monthly observations of year-over-year growth in inflation and money supply, with the twist that while the inflation numbers are current the money supply data is from two years earlier, which makes it possible to judge how much it may influence subsequent inflation.

In the early years, as the graph shows, fluctuations in both variables were moderate. Even so the correlation between them was surprisingly strong, given other, non-monetary factors that also affected prices. The correlation after early 2020 is unmistakable, however, and supports the “monetarist” view that excessive growth of the money supply is the underlying source/driver of the current inflation.

What does the model say about future inflation? The vertical line marks May 2022, the latest data available at the time of writing. The single line to the right of it shows the M3 created over the past two years, which, according to the monetarist model, will largely determine inflation in the coming two years. The line suggests inflation will peak this autumn when the high 15.2 per cent M3 growth has worked its way through the system. The subsequent reduction of M3 growth will exert some downward pressure on prices — but only for a short time since the slowdown has now been replaced by another period of accelerating M3.

We conclude that inflation could accelerate again in mid-2023 and continue well into 2024. As always, this projection may prove to be wrong if other powerful economic developments occur — another wave of the pandemic, for instance. Still, analysts would be wise to take the possibility seriously.

Excess growth in M3 in recent years was caused by the perceived need to finance record fiscal deficits, which QE did. These deficits and their monetization were made politically possible by the government’s adoption of two revolutionary new ideas in economics.

The first was that budgets no longer had to be balanced over the business cycle. Rather, deficits were fine so long as they did not bring the debt-to-GDP ratio above a certain, reasonable level. In fact, overall government debt has risen rapidly above any reasonable level from 86.8 percent of GDP in 2019 to 117.8 in 2022.

A second idea underlying the extraordinary growth in the money supply was politicians’ ready acceptance of “modern monetary theory,” which argues that governments can issue unlimited amounts of money in their own currency without risk of bankruptcy so long as inflation does not result. Inflation obviously has resulted, but this view has been used to rationalize unprecedented peace-time levels and growth in deficit spending.

These theories are now being tested in the real world. The correlation between excess money creation and inflation seen in the graph suggests they are likely to fail. But only time, and possibly considerable economic distress, will bring the final judgment.

Financial Post

John Greenwood is chief economist of the International Monetary Monitor in London. Herbert Grubel, MP from 1993-97, is emeritus professor of economics at Simon Fraser University and a senior fellow at the Fraser Institute.

This article was published in the Financial Post on August 9th, 2022. It is found at:

https://financialpost.com/opinion/opinion-to-understand-and-forecast-inflation-follow-the-money

Ten reasons Canadians are unhappier

Ten reasons Canadians are unhappier

I was surprised but not shocked when the latest international survey of happiness found that Canadians have become considerably less happy. In 2012, when the survey was first published, we were the fourth-happiest country in the world. This year we are 15th.

The index of happiness used to create this ranking is based on survey respondents’ subjective assessment of where on a scale of zero (least happy) to 10 (most happy) they find themselves. As in all surveys that rely on the use of subjective criteria, the results should be treated skeptically. But since the same reasons for skepticism exist for all countries in the survey now and ten years ago, the causes for this drop in our ranking deserve consideration.

The happiness of every individual is influenced by many things that are highly personal but it is possible to identify some factors that are almost certainly shared by most Canadians. For example:

• Inflation has caused real incomes to fall, recently at 8.1 per cent annually, with more price increases expected in the coming months. Policies to stop inflation are likely to cause significant economic problems.

• The cost of housing relative to income (affordability) is the most important component of inflation. It has risen sharply and has made Canada’s largest cities among the least affordable in the world.

• Canada’s federal debt has reached its highest peace-time level. When interest rates rise, as they are widely expected to do, the cost of servicing it and the consequent fiscal burden on taxpayers will increase as well.

• Health and health care have serious effects on Canadians’ happiness. Many of us cannot find a family doctor and face long waits to consult specialists and get access to emergency services, medical imaging and needed surgery. By these measures and in several other ways, we do very poorly in comparison with other developed countries offering universal, free health care to their citizens.

• Immigrants require housing, health care, education and public recreation facilities, all of which are in short supply. In the 1980s immigrants numbered about 100,000 a year. Their number has since increased steadily and will be 400,000 in 2023.

• Freedom of speech is essential to the functioning of liberal democracies but in recent years has become more and more restricted. Codes of political correctness dominate conversations in universities and on the pages of popular media. Violators of these codes are “cancelled” by self-appointed guardians, usually without the opportunity for self-defence.

• In the past, the main role of governments has been to create equal opportunities for success in life but now, increasingly, it is to equalize outcomes. In trying to do so, governments impose taxes and regulations that severely distort incentives to work, save, invest, take risks, and own property. Such policies not only decrease economic growth but are considered by many to be unfair.

• Another important aspect of this redistribution policy that many Canadians regard as unfair involves regulations requiring employers to give various forms of hiring preference to women and people from visible minorities even if other Canadians have the same qualifications, skills and work habits.

• In the past, the public could hold politicians accountable for the environmental and social policies they create. Now, under the new ESG system such policies will be made by businesses without the traditional accountability to the public.

• Canada’s federal government has promised to design policies consistent with “Great Reset”and “Build Back Better” paradigms for organizing the economy and society, creating worry that democratic, free-market capitalism increasingly will give way to government planning and massive redistribution of income.

Space does not permit the listing here of more of the many government policies that make many Canadians unhappy. But every year scholars construct the Economic Freedom Index, which measures a wide range of policies that affect happiness. They do so under the headings of: countries’ size of government; characteristics of the legal system and security of property rights; sound money; freedom to trade internationally; and regulation.

As it turns out, countries’ level of economic freedom is highly correlated with the level and growth of their per capita income, life expectancy and other important indicators of economic and social well-being, which in turn seem likely to determine happiness. By this measure, Canadians have not done well recently. The country’s ranking has fallen from seventh in the world in 2012 to 14th place in 2021.

A study by the OECD indicates what lies ahead. It forecasts that the growth in Canada’s per capita income in the year 2030 will be the lowest among all members of the OECD. Happiness is almost certain to follow the same trajectory unless we see a wholesale reversal of the damaging government policies of the recent past.

Herbert Grubel is emeritus professor of economics at Simon Fraser University and a senior fellow at the Fraser Institute.

 Published on September 14, 2022 in the Financial Post  found at 

https://financialpost.com/opinion/opinion-ten-reasons-canadians-are-unhappier