rudeau, after bungling it on trade and pipelines, needs better advice — fast

There’s no doubt Prime Minister Justin Trudeau’s been having a hard time lately — dealing with nasty remarks from President Donald Trump with regard to tariffs and fallout in connection to the Kinder Morgan pipeline project.

However, Trudeau’s handling of these important matters has been lackluster and it appears that he could use some better advice in dealing with three key issues.

First, the new U.S. tariffs on steel and aluminum, which President Donald Trump justified by reference to the national security argument for protection. In an emotional speech, Trudeau lamented Trump’s neglect of the two countries’ history of military alliances in a number of wars, and said “that Canada could be considered a national security threat to the United States is inconceivable.”

In fact, the national security argument is invoked when imports threaten the very existence of national industries producing weapons and other goods needed by the country’s military. It is argued that the global glut of steel and aluminium caused mostly by mistakes made by China’s economic planners poses such a threat as countries buy these products from China at a discount and sell them to American companies at a higher price.

This is not the place to examine the validity Trump’s argument generally and in the case of Canada. The tariffs may actually be designed to meet his election promises to the firms and workers in these protected industries rather than save them from demise. His use of the national security argument is simply a convenience since he is legally entitled to justify tariffs on this ground without having to face a possibly antagonistic Congress.

The second issue involves the purchase of the Kinder-Morgan pipeline by the Trudeau government. For reasons difficult to understand Trudeau failed to defend the policy by pointing out that it will yield a very high rate of return. Assuming that with his political reputation at stake he will get the pipeline built, the increased capacity to move oil to tidewater and sell it at world prices will eliminate the currently existing gap between the oil prices in the world and in North America caused by the current shortage of capacity to transport oil to world markets.

The new pipeline will bring the federal government at least $3.2 billion in additional tax revenue every year

 

The elimination of this gap will increase the profits of Canadian oil producers by $16 billion a year without increased production and more if output is increased. Assuming a corporate income tax rate of 20 per cent, the new pipeline will bring the federal government at least $3.2 billion in additional tax revenue every year, which is enough to repay the $17 billion involved in acquiring and building the pipeline in less than six years.

After that, the tax revenue can be used to fill the Liberal promise of helping the middle class by lowering taxes or the cost of housing. These policies can be financed earlier once pipeline business is sold back to the private sector without significant losses.

The third issue involves Trudeau’s failure to explain the double standards used by Canadians who protest the construction of the pipeline. On the one hand, they insist that the environmental cost of oil spills is so high relative to the economic benefits that no risks could justify the construction of the pipelines and the subsequent oil tanker traffic along the B.C. coast. Some protesters, who are fighting global warming, also oppose building the pipelines.

Yet, they misrepresent the risk. There is no such thing as perfect safety. We all face a certain amount of danger just by getting out of bed and pursuing life’s routine activities: According to statistics from 1993 (the latest available) one Canadian male dies every four hours as a result of vehicle collisions, every nine hours from accidental falls, every 16.5 hours from accidental poisoning and every 18 hours from homicides. These accidents happen in spite of great efforts by individuals and governments to avoid them. That cannot stop us from doing the things we need and want to do.

The risk of oil spills has been lowered so much by government regulations that it is likely to be very similar to those encountered by individuals every day and the economic and social benefits of the production and sale of oil to Canada are comparable to those enjoyed by individuals going to work every day. The consumption of consumer goods emitting greenhouse gases goes on simply because there are no alternatives reducing total emissions by significant amounts.

Protestors need to be shamed by exposing the double standards they apply to their own actions and those of firms producing, transporting and selling oil that serve the public interest, while contributing trivial amounts to total greenhouse gas emissions in the world.

Herbert Grubel is professor emeritus of economics at Simon Fraser University.

Predicting the Political Landscape after Electoral Reform in BC

Politicians have a notoriously bad record predicting the consequences of policies they have adopted. Recent tax increases on the highest income earners in Canada were predicted to raise revenues by $3 billion but in the first year (2016) the amount of taxes these Canadians in the top one percent paid were $4.6 billion lower than they paid in the preceding year. 

Politicians love forecasts of doom, which increases their power and status as they adopt policies to prevent it. Politicians created recycling programs after the Club of Rome in 1972 predicted that the world was running out of natural resources. The depletion of oil reserves was the conventional wisdom around the turn of the century.

As a wit once said, predictions are very difficult, especially about the future. Predictions like those by the Liberal government, the Club of Rome and energy analysts often turn out wrong because of improbable events that could not be foreseen – the black swans discussed by Nassim Taleb. But predictions also are often wrong because predictable events are not properly considered. History has shown convincingly that high-income earners always shift income through time, space and into low-taxed investments to reduce their tax obligations. Consumers always reduce purchases when the price of a good increases and producers react by increasing supply so that the world will never run out of resources.

The predictions by politicians and pundits about the political landscape in British Columbia resulting from the adoption of a proportional representation system for elections is likely also to be false. The leaders of the NDP and Greens initiated a referendum on this change in the expectation that they would continue to receive at least the same proportion of votes as they did under the old system and thus together would be able to form government easily without precarious majorities as they have since 2017. The Greens believe moreover that they will receive more votes than they did under the old system as voters will realize that they no longer “waste” their votes on a party that has no chance to be in government.

The defenders of the current electoral system predict that the new one will bring into parliament politicians representing existing parties that have never had electoral success before, such as Libertarians, Communists, Christian Heritage, Cascadia, Social Credit and, until the 2017 election the Greens, all of which were on that year’s ballot. They also predict the formation of entirely new parties with policy agendas that are “extreme right-wing”, “racist-fascist”, “anti-immigrant”, “single issue”, “communist “, “libertarian unlimited immigration” etc.

It is quite unlikely that any of the small existing parties or the expected new parties will get more than five percent of the vote, which will be a threshold required by the proposed new voting system leading to seats in parliament. The votes they receive will come from the supporters of the existing major parties but affect them unpredictably and in the aggregate could lead to major changes in their election platforms.

However, in the above list of parties are absent some, which have large constituencies with strong bonds among voters and a good chance to win seats in future elections. These parties are likely to be rooted in the large ethnic populations living in Richmond, Surrey and other suburbs of Vancouver. Opportunistic political entrepreneurs could gain votes with the promise to get spending programs and regulations benefiting their regions in return for joining a ruling government coalition.

 

There are also likely to be opportunities for new, populist parties that attract voters who want to see changes in some policies made unchallengeable by the code of political correctness. According to opinion surveys, this is the case for reform of Canada’s immigration and refugee policies. Maxime Bernier has successfully formed a federal party with such a policy as an important part of its agenda.

Bernier’s proposed reforms of immigration policies are widely condemned as racist and fascist by the political elites in Canada. In fact, they are neither but are designed to serve the national interest, just like the federal Liberals policies on supply management, culture and banking. A BC branch of Bernier’s Peoples’ Party under proportional representation might attract enough votes from all three major parties to enter parliament with uncertain effects on the establishment parties

.

Most of the parties with a chance to gain seats in parliament are unlikely to fit the traditional classification of left or right but they are likely to win enough votes from the NDP, Liberals and Greens to create major changes to the political landscape in British Columbia and with them bring unpredictable new social and economic conditions.

Voters in the BC referendum who do not want to see such changes should vote for the retention of the system that has made the province one of the most prosperous in Canada.

Herbert Grubel

Emeritus Professor of Economics

Simon Fraser University

Published in Vancouver Sun Predicting the political landscape after electoral reform in B.C.

Vancouver Sun editorial, November 4, 2018

https://vancouversun.com/opinion/op-ed/herb-grubel-predicting-the-political-landscape-after-electoral-reform-in-b-c

The Ultimate Effects of PR on the Political Scene and Economics

BC Voters will soon be flooded by a growing amount of information about the superiority of proportional representation (PR) over the majority system (MS) presently used for allocating seats in parliament. If the past is a guide to the future, this information will be almost totally about how PR produces a “fair” distribution of seats, avoids having a government whose members in parliament received less than one half of the votes and thus leads to “wasted” votes.

The expected flood of information is likely to provide little detailed explanation the three different types of PR systems under consideration, mainly because the explanation is extremely difficult as each system involves complex, wide-ranging and fundamental changes in the size of electoral districts, the number of candidates in each and the procedures for allocating votes.

The forthcoming information can also be expected to be short on the discussion of important changes that PR will bring to the political institutions and environment.

First, the political environment will be changed fundamentally by the highly likely increase in the number of parties contesting elections. This prediction is based on a review of academic studies by Lydia Miljan and Taylor Jackson, which showed that the number of political parties is 2.5 in MS countries and 4.6 in PR countries.

Most of the additional parties that BC can expect under PR are likely to represent small groups representing narrow regional, industrial, religious or labour interests and, most disturbingly, members of distinct ethnic populations. The increased number and objectives of the increased number of parties will raise the divisiveness of election campaigns, parliamentary debates and the adoption of laws.

Second, the time it takes to form government after elections is 32 days in MS and 50 days in PR countries. Such an increase reflects the more turbulent political environment brought about by the enlarged number of parties and will reduce the efficiency of the electoral system.

Third, coalition governments formed under the PR system have shorter life-spans than those under the MS system, mainly because political differences among parties in the coalition after some time turn out often to be irreconcilable. The costs of the extra elections fall on taxpayers and the shortness of the life-span of governments impedes their ability to adopt complex legislative programs.

The forthcoming information campaign will also be short on the effects PR has on economic performance. Thus, the PR system gives small single-issue parties leverage over the passage of legislation that is greater than is justified (or fair) in the light of the share of the votes they received. This leverage arises because large parties need the votes of these small parties to form government, which they get only on the condition that they adopt some of the smaller parties’ legislative priorities.

This problem exists presently in BC, where the large NDP party has formed a coalition with the small Green party to form government. The legislative agenda of this government includes a resolute opposition to the construction of a pipeline, which was the priority of the Green party and played a much less important role in the NDP election platform.

The political agendas of small parties in PR countries often are designed to advance the ideology of the extreme political left, which they have not been able to achieve under the MS system and which explains why demands for the adoption of PR comes from them: more income redistribution, spending on social programs, culture, the environment and subsidies to select economic activities. All these policies result in higher government spending.

The extent to which government spending in PR exceeds spending in MS countries has been studied in a number of academic studies, which were summarized by Clemens et.al.: spending as a percent of national income in recent years has been 2.3 percent for MS countries and 2.9 percent for PR countries. Important is the fact that this higher spending leads to correspondingly higher taxes to pay for it and often is financed through deficits, which raise taxes on future generations.

Why should the expected increase of government spending under PR be the focus of the public discussion? As revealed by many academic studies, increased spending beyond a certain optimum level leads to lower economic growth, lower per capita incomes and reduced freedom.

The present levels of spending and taxation in BC have been determined in past MS elections. Voters in the forthcoming referendum should consider that under PR their taxes will go up to finance increased spending that may or may not benefit them.

Let us hope that this fundamental issue will receive the attention it deserves, especially since supporters of PR are highly unlikely to bring it up.

Herbert Grubel

Emeritus Professor of Economics

Simon Fraser University

Published in the Vancouver Sun editorial, October 20, 2018

https://vancouversun.com/opinion/op-ed/opinion-the-effects-of-pr-on-politics-and-economics

FAKE WATCHDOGS FOR FAKE NEWS

The recent surge in fake news has created the demand for government regulations, mostly out of concern that it influenced the last U.S. presidential elections. Regulations would be warranted only if fake news actually affected the outcome and if it could also be inexpensively identified and eliminated.

Fake news very likely had no effect on the election outcome under the reasonable assumptions that both major parties used it to the same degree and their targeted audiences were equally likely to evaluate it properly. The amount and success of fake news originating in Russia is not known but its existence should prompt policies aimed at it alone, not all U.S. communications. That is because the cost of discovering and eliminating fake news is very high, requiring large and costly banks of computers and sophisticated algorithms. The data in the computers conjure concerns over privacy. Importantly, the interpretation of the algorithms risks that the individuals doing the work will let personal ideological and political preferences influence it.

I have had some personal experiences that illustrate this risk. In 1975, I presented a lecture on the future of the international monetary system to the graduating class of the Diplomatic Academy of Chile in Santiago. To my surprise, I found no evidence of the public protests against the Pinochet regime that I had expected after seeing them regularly on CBC.

To understand the difference between the TV news coverage and reality, I asked Canada’s ambassador to Chile, who said other Canadian visitors made the same observation. He then told me that a few days earlier his people had learned that a CBC TV crew had landed in Santiago without following the normal protocol of informing him of its arrival. He discovered that the TV crew had a pre-arranged meeting with a Chilean group in a poor part of the city. The Chileans arrived armed with anti-Pinochet placards. They waved these placards and chanted slogans while the CBC crew filmed them from an angle that suggested a larger crowd. He said the crew paid the villagers who then stored the placards for later use and dispersed. The day after the performance, Canadians saw on TV a supposedly big demonstration in Santiago protesting the country’s president.

In the 1980s, I saw fake news about South Africa, where I taught economics for a semester at the University of Cape Town. There I befriended a Dutch doctor and his wife. They were interns at the famous Groote Schuur hospital, and their parents in the Netherlands were worried that they might get caught in the deadly riots that Dutch newspapers regularly described. One of their letters included a newspaper picture of a scene allegedly showing the aftermath of such a riot. The scene was of the hospital’s courtyard. The same, landscaped yard the couple saw each day and where staff often ate their lunches and took naps on the grass. It was no riot scene. Something had been faked.

These two episodes illustrate the extent to which supposedly objective media can and do produce fake news slanted by the political views of their managers and employees. We should expect the same from any proposed agencies charged with the objective task of suppressing fake news. For these reasons, it seems better to prevent the likely small cost of fake news by relying on the common sense of the common people rather than rely on the decisions of a few employees of government agencies.

Herbert Grubel is emeritus professor of economics, Simon Fraser University.

The article was published in the Financial Post on May 2, 2018

THE FUTILITY AND RISK OF BALANCING US TRADE

President Donald Trump’s policies to balance trade and increase employment will fail because of an iron law of international economics: If a country spends more on goods and services than it produces, the difference has to be imported. This equation summarizes the law:

Imports – Exports ≡ (Investment - Savings) + (Government Spending - Taxes).

Steve Hanke at Johns Hopkins University showed that US data are consistent with this identity. During the years 1975-2016 investment minus savings were $9.6 trillion, government spending minus taxes was -20.0 trillion, which makes the right side of the equation come to -$10.4 trillion. Over the same period Imports minus Exports – the left side of the equation – came to $11.2 trillion. The $0.8 trillion difference between the two sides of the equation represents statistical measurement errors.

The reason why Trump’s import-reducing and export-increasing policies will not create balanced trade is that the existing overspending in the United States causes market forces to appreciate the dollar exchange rate, which leads to higher imports and lower exports until the trade deficit again matches the domestic overspending and the initial effect of these policies has disappeared.

Unfortunately, Trump’s protectionist policies combined with domestic overspending has a possible serious, rarely discussed negative effect on US national income: It endangers the country’s lucrative export of US dollar notes and Treasury securities because it threatens the confidence the users of dollar notes and treasury securities have in the future stability and value of the exchange rate, credit-worthiness of the federal government and the growth and relative size of the US economy in the world. 

As will be documented below, the size of the Euro zone and the stability of its economy in recent years when the US economy was unstable and growing slowly already has increased the world demand for Euro notes and short-term government securities. If and when the growth and stability of the Chinese economy approaches that of the United States, the world might replace US dollar notes and securities with those of China.

The amount of currency notes exported cannot be observed directly. However, in a study published by the Federal Reserve Board of Governors, $550 billion worth of US dollar notes (mostly in $100 denominations) were held abroad at the end of 2011. These dollar notes are used by foreigner as a store of value and in commercial transactions, many of which are likely to involve underground and illegal activities. Considering past growth rates, in 2017 the export of such notes probably was about $200 billion.

Since these notes cost virtually nothing to produce, their export adds to the profit of the Federal Reserve, which is transferred annually to the Treasury and thereby decreases the government deficit as if tax revenue had increased. The sum of $200 billion in 2017 was large enough to cover the cost of four of Trump’s coveted Mexican border walls.

The story does not end there. According to the IMF, governments around the world in 2017 held official reserves worth $9.6 trillion, of which $6.1 trillion were in the form of short-term securities issued by the US Treasury. These securities are very liquid and are held by governments for propping up the value of their national currencies during crises.

US income is created through the foreign holdings of these securities by the fact that they are short-term and require the Treasury to pay low interest rates while the money they raise can be used to buy longer-term bonds or make direct investment at home or abroad. Assuming that the short rate is one percent and the long rate is five percent, the $6.1 trillion of US short-term securities held by foreign governments currently brings the Treasury an implicit annual return of $244 billion and reduces the deficit correspondingly.

In the 1960s Valéry Giscard d'Estaing, who was then the French Minister of Finance suggested that the world’s use of dollar denominated securities and currency notes conferred on the United States an “exorbitant privilege”. At the time, French politicians were particularly upset about direct US investment in the country’s profitable industries, which they considered being financed by the same money they had provided America when they acquired US short-term securities for their official reserves.

The profitable export of US currency notes and securities is the result of the world’s need for a universally accepted standard of value, the efficiency-enhancing use of dollars in trade and the properties of US short-term securities that are highly liquid and have a low risk of default. These properties of the dollar developed spontaneously after the end of the Second World War together with the status of the United States as the world’s largest and open economy with a solid record of political and economic stability. Protectionism and chronic domestic overspending bring the risk that these roles of the dollar will be diminished and ultimately lead to the use of other countries’ short-term securities in their reserve portfolios.

This development has already begun. Between the third quarter of 2016 and 2017, dollar denominated reserves held by foreign governments rose 13.3 percent from $5.4 trillion to $6.1 trillion. Over the same period Euro-denominated assets increased 18 percent from $1.6 trillion to $1.9 trillion while reserves denominated in Yen, Pound Sterling, Australian and Canadian dollars together increased 20 percent from $1.0 trillion $1.2 trillion.

Advice to Trump coming out of the preceding analysis: Do not pursue protectionist policies. They will not succeed and they threaten your government’s business of supplying the world with dollar notes and short-term securities. Remember that this business in 2017 brought a profit of $444 billion, which is much more than enough to finance your Mexican wall and increased defence spending without having to raise taxes.

In praise of real estate speculators

Throughout history, politicians and the public have hated speculators on the grounds that they create scarcities, raise prices and cause hardships for consumers. This view is behind the recent decision by the B.C. government to impose a tax on unoccupied housing presumed to be owned by speculators and which is expected to lower the cost of housing.

The implementation of this policy has run into a number of problems that can be solved by some tweaking of the law, but it will do nothing to reduce prices in the long-run. Speculators raise house prices when they buy and keep them empty or rent them out. The speculators realize profits only when they sell them later, at which time they lower prices. In effect, speculators do not add to the demand for and cost of housing, but only smooth it through time. The real cause of the high and rising cost of housing is a continuous excess of demand over supply.

The excess demand in Metro Vancouver is determined by the high level of immigration, which in recent years has brought 250 families to the region every week. Under the policies announced by the current government, by 2020 this number will be 375 families a week. Adding to this demand are the housing requirements of foreign students, who in 2017 numbered 130,000 and are expected to grow substantially in the future.

In principle, in a market economy the supply of housing should keep up with the growth in demand. However, as the record shows, this has not happened. The reason given by the construction industry is that it faces delays and cost-increasing obstacles due to the scarcity of building sites, zoning restrictions, regulation affecting building codes, and a shortage of skilled workers. Another reason explaining the scarcity and high cost of rents is the existence of rent controls, which lower returns from investment in rental units over their lifetime to levels at which investors are staying away in troves.

Neither demand nor supply are likely to change soon. Politicians will not reduce demand coming from immigration. Their electoral success depends too much on the votes of immigrants and on the financial support from the real estate industry, employers of cheap immigrant labour, and producers and retailers whose markets are increased by immigrants. Any politician proposing the end of rent controls faces sure electoral defeat at the hands of renters subsidized by the existing law.

Neither will there be a decrease in the number of foreign students. Public universities increase their financial resources through the tuition paid by foreign students. Many private educational institutions depend entirely on income from foreign students.

Given the prospect of future growth in the demand for and continued limits on the increase in the supply, the public will have to live with these facts unless they show their displeasure at the ballot box with the policies of Canada’s virtue-signalling elites who are lobbying for ever-larger numbers of immigrants in the future but show little concern for the blight of ordinary Canadians facing a housing affordability crisis. Asking these elites for taxes on speculators, empty housing and tougher rent controls will not do the job.

Published in the Vancouver Sun on March 25, 2018

Canadian Immigration Policies: Blueprint for Europe?

Abstract: In Europe discussions about immigration policies have been wide-spread and heated ever since a flood of illegal immigrants have reached Europe’s shores and caused problems with labour markets, housing, fiscal, social and cultural institutions. Some commentators see the solution to some of these problems in the adoption of the Canadian model for the selection of immigrants. This paper contributes to this discussion by a description of current Canadian immigration policies and a discussion of the negative economic and social effects it has produced. It concludes with a presentation of reforms of the existing system that have been proposed and speculates why politicians have been unwilling to adopt any of these reforms.

Note: I thank Martin Collacott and Patrick Grady for their helpful comments on an earlier draft of this paper, a summary of which has been published in German in the Swiss magazine Weltwoche on December 30, 2017. The article has been accepted for publication in the ifo DICE Report - Journal for Institutional Comparisons,  Forum on the special topic “Labour Migration Policies” scheduled for publication in March 2018 by the ifo Institut - Leibniz-Institut fuer Wirtschaftsforschung an der Universitaet Muenchen. DICE Reports can be found at www.cesifo-group.de/DICEreport.

The paper can be found at the Social Science Research Network website   http://ssrn.com/abstract=3084989 

JEL Classification: F21, F22, J6, O4, O5

The European Community and its member countries are searching for solutions to the problems caused by the ongoing flood of migrants from abroad. One solution discussed widely involves the adoption of the system used by Canada in the determination of the number and characteristics of migrants admitted (Slater 2015 and Meardi et.al. 2016). In considering the adoption of the Canadian model, policy makers need to know that while it promises many benefits in theory, in practice it is seriously flawed and might not serve Europe well.

The model has the following basic features. The government annually submits an immigration target for the year to Parliament, which is routinely approved without debate. In 2017 the target was 300,000, up from 280,000 the year before and 240,000 on average during the years 2006-2016. It is slated to rise to a 350,000 by the year 2020. Since the mid-1980s, the target has been set to have immigrants represent about .75 percent of the existing population.

The immigrants are selected by Canadian officials from a large pool of applicants and are granted visas after assignment to four different categories (Government of Canada (1)), the largest of which represents “Economic immigrants”, who are mainly skilled workers but also includes their accompanying spouses, partners and children, investors, the self-employed, caregivers and entrepreneurs. The economic immigrants make up 58 percent of the total.

The second class are the “Family class immigrants”, one quarter of which are parents and grand-parents and three quarters are the spouses, partners and children of immigrants who had not accompanied their spouses when first they settled in Canada. They made up 28 percent of the total while “Refugees” (also known as Refugee Claimants) 13 percent and “Others” one percent of the total.

The economic migrants are selected through the use of a points system (Immigration Canada (2)) that assigns a maximum of 25 for the level of education, 24 for language proficiency in English or French, 21 for work experience and 10 each for age, arranged employment and adaptability. For admission, the economic migrants need to have at least 67 out of 100 possible points and, like all immigrants, must meet health and security requirements. A small number of economic immigrants are admitted without use of the points system by provincial governments to meet special local needs.

Recently, this system has been modified (Semotiuk 2016) through the creation of a class of applicants with “Canadian work experience”, which in turn was modified by the introduction of the class qualifying for “Express Entry”. The main goal of these modifications has been to enable a large number of foreign students who have completed a university education in Canada to receive immigrant visas more easily and quickly since through their educational achievements they have demonstrated their knowledge of English or French and likelihood of economic success.

Applicants in the investor class (Government of Canada (3)) do not have to pass the points test and until 2014 were admitted if they could show that they have business experience, a net worth of at least CAD $1.6 million and will invest at least CAD $800,000 in Canada. A new program (Canada Visa (No date)) requires that they have a net worth of at least CAD $10 million and the funds to invest CAD $2 million for 15 years in the Immigrant Investor Venture Capital Fund.

Parents and grand-parents are granted immigrant visas if their offspring already in Canada commit themselves to cover their cost of living and medical care and the annual quota allocated by Parliament is not exhausted.

Canada’s handling of its international obligation for the admittance of refugees (Historica Canada No date) should be of particular interest to Europeans. Canada supports refugees escaping the turmoil of civil wars and unrest indirectly through financial grants to international agencies that operate refugee camps abroad. The idea is that these types of refugees will and should return to their home countries after the end of hostilities, where they have strong ties. It is believed that if they settle in Canada, they are likely to remain and are lost to their native countries’ reconstruction efforts.

Refugees who flee persecution, torture and the threat of death and reside in the international camps are interviewed by Canadian officials who travel to these camps. Under the 2017 plan, immigration visas are granted to 40,000 of the neediest of them. Refugees asking for acceptance at Canada’s airports have been very small in number relative to those resettled from camps abroad because of effective agreements with airlines to prevent boarding of potential claimants without a visa.

Canada has no problems protecting its borders from illegal immigration of the sort that plagues Europe. Canada’s long coast lines are difficult to reach by small boats from overseas and past experience shows that large ships will be turned away so that none have attempted access for many years. Agreements with international airlines have been used successfully to limit severely the arrival of asylum seekers at Canada’s airports.

The land border is in principle protected from the inflow of asylum seekers by the Safe Third Country Agreement with United States (Government of Canada (4)) under which refugee claimants can be turned back on the grounds that they are leaving a safe country and are shopping for access to more generous social assistance programs.

Canada’s government is proud that its policy of selecting immigrants without regard to their ethnic, racial or religious backgrounds. 

What Lessons for Europe?

So what aspects of the Canadian model could be used in the design of a rational and publicly acceptable policy for the European Union and its members?

The Canadian model has no information that could help in the design of dealing with Europe’s pressing problem of how to more effectively protect its borders from asylum seekers, how to deal with the perceived threat to its religious and cultural institutions and practices and to protect the public from terrorism.

The main appeal of the Canadian model to European policy makers stems from its presumed success in selecting immigrants who benefit their countries by raising the income of their populations, tax revenues and contributions to social insurance programs.

The first effect is the subject of much disagreement among economists. Conventional price theory suggests that the pay of immigrants equals their marginal contribution to output and as they use their income to buy an equal amount of goods and services, the incomes of native workers are unchanged. Some economists argue that the native workers benefit because immigrants offer them the opportunity to trade and by complementing them at work raise their productivity. The value of these effects is very difficult to estimate but at best is very small relative to the fiscal burden caused by the Canadian immigrants in recent decades.

The main cause of this fiscal burden is that Canadian immigrants who arrived after 1986 in the year 2005 had average incomes equal to only 70 percent and pay income taxes equal to only 54 percent of the average paid by other Canadians, while at the same time they absorbed the same amount of government services as did other Canadians in the form of free health, educational and social programs and through spending on the protection of persons, property, the environment and the many other spending programs characteristic of modern industrial countries. This information about the performance of recent immigrants is provided by Statistics Canada and is used by Grady and Grubel (2009) to consider their implication for government policy.

The difference between the taxes paid and benefits received by the average recent immigrant has been estimated in the Grady-Grubel study to come to about $6,000 per year. Considering the total number of immigrants in 2013, this difference implies that they imposed a fiscal burden of about $30 billion on other Canadians that year. This burden increases with the arrival of more and increasing numbers of immigrants.

The $30 billion equals about five times what Canadian governments spend on foreign aid and foreign affairs and equivalent to 70 percent of what they spend on the military and the protection of persons and property.

The idea that immigrants can prevent the pending insolvency of unfunded public pension program is illusory. Immigrants reduce the unfunded liabilities while they are young but increase them once they are retired. Computer simulations show that immigrants can reduce unfunded liabilities only if their numbers increase continuously to offset this aging effect. For immigrants to offer a solution to the problem of the unfunded liabilities, the annual inflows would soon reach unsustainable levels (Bannarjee and Robson 2009).

What Explains Failures of the Model?

One explanation of the poor economic performance of the system is that in 2015 only about 30 percent of all immigrants, the so-called principal applicants have passed the points test. The other 70 percent consist of their spouses and children, parents and grand-parents, and refugees whose economic prospects have not been assessed.

 

Investors, who might be expected to have high incomes and pay high taxes, fail on both grounds because many of them invest their money in housing rather productivity-enhancing business capital, continue to live in their native countries and pay income taxes only there. Their spouses and children live in the houses they have purchased and live on non-taxable transfers from the investor while they use Canada’s free health, education and other social programs.

Because of these problems, the system described above was changed in 2014 to where investors now face much stiffer requirements to qualify for a visa, which has led to a dramatic reduction in number of investor immigrants and the damaging practices described.

   

Another explanation of the poor economic performance of recent immigrants is that the quality of their education and skills required by the Canadian government (Government of Canada (5)) do not actually meet Canadian standards because the foreign institutions of higher learning used to document the immigrants’ educational attainment levels themselves have lower standards.

For example, Canadian employers with immigrants who have an engineering degree from an Asian university often use them only to prepare engineering drawings rather design buildings and bridges. Another example involves immigrants with certificates qualifying them to work as medical doctors. Most of them are unfamiliar with Canadian institutions, practices and pharmaceutical products and take a long time to pass Canadian examinations qualifying them to practice medicine in the country.

Further adding to the poor economic performance of immigrants admitted on the basis of their high selection points is that some may have used forged certificates of educational and language attainments (Green 2009). No reliable estimates exist of the magnitude of this problem but may be inferred from the fact that many small shops located around the Canadian High Commission in Delhi are doing a thriving business selling such certificates and the internet offers many business addresses for the purchase of fake certificates (Diploma Company (no date)).

Labour market discrimination has been cited as an explanation of the low incomes of recent immigrants. Such discrimination may exist, but its importance is diminished by the fact that for some time many businesses in Canada have been run by immigrants who according to the work of Nobel laureate Gary Becker (summarized by Murphy (2015)) may be expected to hire underpaid immigrant workers to maximize their profits but who in the process raise the wages of the workers suffering from discrimination by other Canadian employers.

Other Problems with the Canadian Model

Canada’s immigration model has had some other effects that do not increase the well-being of the general population. Thus, as the data on incomes show, immigrants have increased the supply of low-skilled and low-paid workers, many of which filled jobs that Canadians are unwilling to accept at existing wage levels. This fact is praised widely, but it also has an important down-side.

These immigrants depressed the wages of all low-skilled workers and increased the incomes of employers and professionals. Abdurrahman Aydemir and George Borjas (Aydemir and Borjas 2007) concluded that immigration decreased the earnings of Canadian high school dropouts relative to the earnings of workers with at least a college diploma by at least 12%. As a result, the inequality of Canada’s income distribution has increased significantly.

The hiring of low-skilled and low-wage immigrants has had an additional negative effect. It reduced the incentives of employers to invest in labour-saving capital and technology. Such investment would have raised the productivity and wages of Canadian workers and made them more willing to accept the jobs that previously they had shunned because they paid them too little. These benefits could have been attained while the profits of employers remained unchanged.

Absorptive Capacity and Parliament

Parliament’s setting of the annual number of immigrants has not worked well for Canadians as there are important indications that it exceeds the country’s economic and social absorptive capacity.

Most of the immigrants have settled in Montreal (14 percent), Toronto (40 percent) and Vancouver (15 percent) to join communities of people from their home countries (Metro Vancouver (no date)). Virtually none have settled in Canada’s vast, thinly populated areas because they are not well suited for human habitation and have been losing jobs and residents since farming has become increasingly mechanized. 

Every week about 250 immigrant families have been adding to the demand for housing in the Greater Vancouver area and 400 in Toronto (Government of Canada (2)), (Statistics Canada 2017). This added demand has contributed significantly to the increase in the cost of housing in these two cities, which is viewed by many to have reached a crisis level. Speculators, who are often blamed for these price increases merely are anticipating their continuation and move forward in time the expected future excess demand for housing and price increases caused to a considerable degree by the large number of immigrants.

Importantly, these large additions to the population in these large cities have also taxed the capacity of the cities’ road, water, sanitary, transit, recreational, medical and educational facilities to where traffic congestion, wait-times for medical treatment and access to public recreational opportunities facilities impose great economic costs and inconveniences on the population.

Advocates for the present level of immigration argue that all of the costs just described would disappear if the supply of transportation infrastructure, housing, hospitals, schools etc. kept up with demand. These advocates blame governments’ inadequate funding and excessive regulations for the existing problems (Lammam 2017). This proposition is valid but misses the point that the political system has now proven for many years that it is incapable of providing the funding and of deregulating the construction industries to prevent the housing crisis and crowding of public facilities. In addition, the fiscal burden caused by recent immigrants contributes to the scarcity of funds for government spending on housing and infrastructure.

Yet, the solution to, or at least alleviation of these costly burdens on Canadians could be achieved by a number of policy changes, which were suggested to me in an email by James Bissett, a former Ambassador and former head of Canada’s immigration service run by the federal government:

“Replace the judgement of civil servants in the selection of immigrants with that of Canadian employers who have powerful incentives to hire only applicants whose wages match their productivity, but who, in order to ensure that the taxes they pay at least match their use of public services, are required to hire only immigrants whose wages are at or above the average in the region in which the employers are located. Investors should be required to put their funds into productive business investment and pay taxes on their incomes abroad. In the future, parents and grand-parents should not be granted immigrant but only visitor visas.”

Another suggested solution would be to reduce temporarily the number of annual immigrants significantly to, say 50,000, which would cease mass immigration but allow the beneficial flow of migrants that have skill sets they can use to serve the interest of the economy and society. After the construction of housing and infrastructure has caught up with demand and the absorptive capacity of the country has been determined in the light of recent developments, the number of immigrants per year can be changed to the optimum level.

 

Politicians have ignored the call for the kinds of reforms suggested by Bissett and for the temporary reduction in immigration levels that would make immigration policies properly serve the public interest. Why have politicians ignored these suggestions for reform? The answer is found in public choice theory (Lee 2012): Politicians are afraid that powerful and highly motivated interest groups will reduce their financial and electoral support and thus threaten their parties’ election chances.

These interest groups consist of immigrants who want to see their communities grow in numbers and political influence; employers wanting cheap labour and larger markets for their output; the construction and real-estate industries benefiting from the growth in the residential housing market; the owners of homes who enjoy large capital gains on the property; the builders of transportation infrastructure facilities who are needed to deal with traffic congestion; the professionals who enjoy the larger markets for their services as supervisors in businesses teachers and professors; the civil servants and welfare workers who are paid to serve the needs of immigrants and the vocal groups of idealistic individuals who believe that it is Canada’s responsibility to reduce poverty and suffering in the developing world and whose views are spread widely by the media.

Lined up against this collection of powerful, rich and idealistic supporters of the present immigration policies are the overwhelming numbers of Canadian voters who are too busy working and caring for their families to have the time to inform themselves about the burdens immigrants impose on them, especially since the interest groups and politicians with the help of the media are very effective in hiding or denying the damage mass immigration is doing to their interests (Munger 2017).

    

Canada’s first-past-the-post electoral system discourages the foundation of an anti-immigrant party of the type found in a number of European countries where proportional representation has allowed such parties to achieve substantial electoral successes and seats in parliament and which have influenced the debate over and the design of immigration policies. Canada’s immigration policies will remain unchanged at least until a reform of the electoral system, which the present government has promised in its election campaign but has failed to implement after two years in office.

References

Aydemir, Abdurrahman and George J. Borjas (2007), “Cross-Country Variation in the Impact of International Migration: Canada, Mexico, and The United States”, Journal of the European Economic Association, June, 5 (4): 663-708

Bannerje, Robin and William Robson (2009), “Immigration’s Impact on the growth and age structure of Canadian Workforce”, Chapter 7 in Grubel (2009).

Canada Visa (no date), “Canada Business Immigration - Investor Category” found at https://www.canadavisa.com/canada-immigration-investors.html, accessed December 1, 2017

Government of Canada 1 (no date), “Do you want to come to Canada, or extend your stay” found at https://onlineservices-servicesenligne.cic.gc.ca/eapp/eapp.do, accessed December 1, 2017

--------------------------- 2 (no date), “Recent Immigrants in Metropolitan Areas: Canada – A comparative Profile based on the 2001 Census”, found at https://www.canada.ca/en/immigration-refugees-citizenship/corporate/reports-statistics/research/recent-immigrants-metropolitan-areas-canada-comparative-profile-based-on-2001-census/partg.html, accessed December 1, 2017

--------------------------- 3 (no date), “Immigrant Investor Program” found at https://www.canada.ca/en/immigration-refugees-citizenship/services/immigrate-canada/investors.html, accessed December 1, 2017

--------------------------- 4 (no date), “Canada-US Safe Third Country Agreement”, https://www.canada.ca/en/immigration-refugees-citizenship/corporate/mandate/policies-operational-instructions-agreements/agreements/safe-third-country-agreement.html, accessed December 1, 2017

--------------------------- 5 (no date), “Have your education assessed – Skilled Immigrants”, https://www.canada.ca/en/immigration-refugees-citizenship/services/immigrate-canada/express-entry/become-candidate/eligibility/education-assessed.html, accessed December 1, 2017

Diploma Company (no date), “Fake Diploma India, Can$ 252.13”, found at https://www.diplomacompany.ca/order-fake-diploma-india.html, accessed December 1, 2017

Grady, Patrick and Herbert Grubel (2015), Immigration and the Welfare State Revisited, Vancouver: The Fraser Institute https://www.fraserinstitute.org/sites/default/files/immigration-and-the-welfare-state-revisited.pdf, accessed December 1, 2017

Green, Norma (2009), “Fake Documents Flood Canada Visa Office in India”, Immigration Watch Canada, found at http://immigrationwatchcanada.org/2009/02/09/fake-documents-flood-canada-visa-office-in-india/, accessed December 1, 2017

Grubel, Herbert, editor (2009), The Effect of Mass Immigration on Canadian Living Standards and Society, Vancouver: The Fraser Institute, https://www.google.ca/search?q=grubel+the+effects+of+mass+immigration&rlz=1C1GCEA_enCA751CA751&oq=grubel+the+effects+of+mass+immigration&aqs=chrome..69i57.13918j0j7&sourceid=chrome&ie=UTF-8, accessed December 1, 2017

Historica Canada (no date), “Refugees”, The Canadian Encyclopedia, found at http://www.thecanadianencyclopedia.ca/en/article/refugees/, accessed December 1, 2017

Immigration Canada (no date), “Who Qualifies for Canadian Permanent Residence/Skilled Worker Immigration?” found at http://www.immigration.ca/who-qualifies-for-canadian-permanent-residence-skilled-worker-immigration/, accessed December 1, 2017

Lammam, Charles and Hugh MacIntyre (2017), Myths of Infrastructure Spending in Canada, Vancouver: The Fraser Institute, found at https://www.fraserinstitute.org/sites/default/files/myths-of-infrastructure-spending-in-canada.pdf, accessed December 1

Lee, Dwight R. editor (2012), Public Choice, Past and Present: The Legacy of James M. Buchanan and Gordon Tullock, Springer Science & Business Media, Dec 9, 2012

Meardi, Guglielmo, Antonio Martín Artiles and Axel van den Berg (2016), “A Canadian Immigration Model for Europe? Labour Market Uncertainty and Migration Policy in Canada, Germany and Spain”, in Jon Erik Dølvik, Line Eldring(ed.) Labour Mobility in the Enlarged Single European Market (Comparative Social Research, Volume 32) Emerald Group Publishing Limited, pp.99 – 124

Metro Vancouver (no date), Immigration and Diversity, found at http://www.metrovancouver.org/services/regional-planning/PlanningPublications/Census2006_Immigration_Bulletin_6.pdf#search="immigrants", page 2, accessed December 1, 2017

Munger, Michael C. (2017), “On the Origins and Goals of Public Choice Constitutional Conspiracy?”, Independent Institute, June 29 found at http://www.independent.org/issues/article.asp?id=9115, accessed December 1, 2017

Murphy, Kevin (2015), “How Gary Becker saw the scourge of discrimination”, Chicago Booth Review, found at http://review.chicagobooth.edu/magazine/winter-2014/how-gary-becker-saw-the-scourge-of-discrimination, relatively low standards of

Semotiuk, Andy J  (2016), “Immigration Minister Should Restore The Canadian Experience Class”

Forbes, August 18 found at https://www.forbes.com/sites/andyjsemotiuk/2016/08/18/immigration-minister-should-restore-the-canadian-experience-class/#62e86ef77500, accessed December 1, 2017

Slater, Joanna (2015), “Germany looks to Canadian model for immigration policy inspiration” The Globe and Mail, March 9

Statistics Canada (2017), “Canada at a Glance: Population”, found at https://www.statcan.gc.ca/pub/12-581-x/2017000/pop-eng.htm, accessed December 1, 2017