Friday, December 22, 2006

Why Ontario will go broke

In my previous post, I looked at Michigan's economic and fiscal woes, and after a little digging, I found this chart from the Canadian Taxpayer's Federation that shows how the Stalinist single payer model will bankrupt Ontario. If in a mere ten years health spending doubled, and went from consuming 31.5% of provincial expenditures to around 40%, what will happen in the next ten years in light of the baby boomers retiring? Some of this spending is due to population, with the population increasing to over 12.3 million (estimated) in 2006 from 11.4 million in 1991. Also considering that this ten year period was one of low inflation, we can discount that as a major contributing factor as well.

So here are the facts as it stands:
  • Health care spending is the fastest growing part of the provincial expenditures on a per-capita real basis. At current rates, health care will eat up over 50% of government expenditures if the status quo is maintained.
  • With an aging population, and the baby-boomers starting to retire, you'll have additional demands for health care resources. These people will be retired and will not be contributing the much less in taxes as they're not working. So you're looking at lower revenues and increased expenditures going down the road.
  • Since this is a government run system, it automatically makes it a political system. They baby-boomers want all the bells and whistles (costs be dammed), and will not tolerate tax increases to pay for it. They will be become a large voting bloc that politicians ignore at their peril.
  • We haven't mentioned that since it is government run, it is inherently inefficient, and featherbedding for self serving unions and health care bureaucrats takes precedence over patients. This accelerates the problems above.
So what is a politician to do? Especially a politician who treats single payer, government run health care as an article of faith? The options for such a politician are as follows:
  • Start cutting all other expenditures. Education? Kids don't vote and there are more retirees than parents with school age children. Won't get much love from the teacher's unions, but the retirees are more powerful by this point.
  • Ration as much health care as possible. But then there is a tipping point when the voters revolt over this.
  • Raise taxes. Retirees on fixed incomes are really ornery over taxes, and it has to be done where it soaks everyone but retirees. So business taxes and income surtaxes are increased, which leads to;
  • Every major employer moving shop somewhere else. No workers and no business equals no revenues.
The vicious circle of socialism in a nutshell. Demographics + supply & demand + governmental inefficiency + status quo thinking = bankruptcy.

Thursday, December 21, 2006

SCTV - Mel Torme's rendition of the Star Spangled Banner

Michigan's descent into the fiscal abyss

This article from the Detroit News discusses warnings from Michigan governor Granholm that the state could face a budget deficit of $1 billion dollars. Now with the Democrats controlling the state assembly for the first time in a long while, this key quote is of note:
The governor would not say if she was considering a tax increase to keep the
state afloat.
The last thing Michigan needs are tax increases in such dire economic circumstances. One of the reasons why Michigan has lagged all other states is due to its tax system. One of Grahnholm's proposals to exacerbate the Michigan economy was her proposal to replace the state's hated Single Business tax with a more onerous tax regime which is part gross receipts tax, part tax on assets, and part income tax.
The two biggest reasons that businesses are avoiding Michigan like the plague are high taxes and unions. Granholm's refusal to rule out tax increases and her coutnerproductive business tax proposals will make businesses even more leery of investing in the Great Lakes State, which will fuel the exodus of people out of the state in search for better prospects.
As a friend of mine said who still lives in Metro Detroit is, "Thanks to Jennifer Grahnolm's economic policies, the deserted roads make my commute to work that much easier."

Economic Comparisons - Canada versus U.S.

What is seen and not seen. I had a discussion with a somewhat regular reader of this site, and a couple of statements he made piqued my attention. The first was that Canada has outperformed the U.S on many economic measures since 1997, and that the U.S had a higher level of government debt realtive to Canada.

With these two sinppets in mind, I decided to illustrate what I inherenty know, that the Canadian economy and Canadians at an individual level, are lagging their American counterparts and that gap is widening.

This chart (from the Canadian government) shows the relative productivity differences between Canada and the U.S. The paper in question examines the increasing gap in productivity and standard of living between Canadians and Americans.
The key exerpt from this report came at the conclusion of this 2002 report:

Canadian living standards will undoubtedly increase in the next decade, but their average growth rate will probably be less than that of labour productivity due to demographic factors. In all probability, the growth rates in American living standards will continue to outpace Canadian growth rates; this suggests that the widening gap in living standards between Canada and the United States may be expected to continue for some time to come."

This report focues most exclusively on labour productivity and relative standard of living. There are other economic numbers that are related to productivity and standard of living that merit further consideration.
T
here are also several related charts which helps explains the widening gap for the period. First is combined debt-to-GDP ratios. I use combined because Federal debt only is skewed due to the relative sizes of the Federal and state/provincial governments for the two countries. Provincial governments tax and spend more on a realative basis in comparison to U.S. states, while the Canadian Federal Government spends relativelys less than the U.S. Federal Government, thus the reason for using combined numbers. These numbers show the increase in debt for the G-7 countries, but focus on the relative debt conditions of Canada and the U.S. in both 1974 and 1994.

It should be noted that the Canadian and American debt positions were probably at their worst in 1994, and both countries have improved their fiscal conditions. However, it is safe to say that the total government debt to GDP ratio for Canada is still significantly higher than in the U.S.
The final little snippet of information would be exchange rates. The Canadaan dollar from 1976 to 2002 was on a downtrend for the entire period. The high for this period was $1CDN = $1.3890 U.S on June, 24, 1976 and the low for the period was $1 CDN = $0.6179 on January 21, 2002. Since 2002, the Canadian dollar has recovered to nearly ninety cents, primarily due to strong commodity prices and the weakening U.S. dollar (thank you very much congress for lacking fiscal discipline). However, this strengthening of the Canadian dollar has adversely impacted Canada's non-resource based export industries.
For the periods in question, I think the three statistics are interrelated: high government debt, weakening currencies and declining productivity all play a role in the increasing gap in standard of living between your typical Canadian and American. The fiscal and economic indicators can be attributed to government policy. It is not mere coincedence that Canada's fiscal condition (in terms of a strong national balance sheet and currency) was strongest right before Trudeau and his provincial counterparts ramped up the welfare state, and government interference in the economy?
The gap in standards of living can be attributed to higher taxes, more government regulation, and more rigid labour markets in Canada. The weakening of the dollar from 1976 through 2002 has masked a lot of this. A country can have strong economic performance when its currency is weakening because the growth is measured in devalued currency. A better meansurement is to adjust for currency differences with the currencies of it largest trading partners.
All things being equal, there should be no reason fundamentally for this gap, but government policy has led to Canadian's standard of living declining.

Monday, December 11, 2006

Augusto Pinochet, RIP 1915-2006

This much reviled man was a patriot. He stopped a communist takeover of his beloved Chile, brought in free-market reforms, and left a democracy when he left. Much like Franco, he was reviled for the human rights abuses that occurred on his watch. While this is true, and I have sympathy for those who suffered under his rule, it should be noted that the Communist alternative to Pinochet would have been much worse.

People have a selective memory of authoritarian rulers: these same people of condemned Pinochet and Franco keep silent about the abuses in Cuba, Communist China, Vietnam, Nicaragua, and North Korea. This selective moral indignation has not been lost by a large segment of the Chilean population.

General Pinochet was a patriot who loved his country and left it in much better shape than when he took over. He was a controversial figure who did what he felt was necessary to keep Chile free. History will look back at General Pinochet and see him as a great, though controversial figure in the history of his nation.

Tuesday, December 05, 2006

Liberal leadership thoughts

Saturday's Liberal convention has cemented what I have always thought about leadership contests: in a convention format, you do not want to be the frontrunner unless you can win it on the first ballot. Stephane Dion's up the middle victory was similar to Joe Clark's in 1976, or Dalton McGuinty's in 1997(?). Look at Joe Clark (1983), Murray Elston, Gerald Kennedy, Svend Robinson - all of them were presumptive front-runners going into their respective conventions, only to lose several ballots latter. It seems with a delegate convention, there develops an "any but the frontrunner" momentum as each ballot passes, and the candidates start making deals to get the dropped candidates' support. I also think that front runners don't have the same pressure to make deals during the convention, believing that they can attract delegates in subsequent ballots without all the compromises that the other candidates need to make.

Either way, Stephane Dion played the convention perfectly - he knew where the delegates were, what deals needed to be made, and stuck to his plan. Dion and his team have shown that they are savvy political operators by pulling this victory off.

Stephane Dion seems like a decent, intellectually consistent leader, and is a good change from the Chr├ętien/Martin years. However, it seems at this time that he is the right leader at the wrong time, during one of those periods where the Liberal party lies in fallow after too many years in power, and with the Conservative party in a period of ascendancy.

Saturday, December 02, 2006

First step in the inevitable breakup in Canada

I was in Myrtle Beach, SC and Jacksonville, FL last week, so I just recently found out about Harper's gambit with a House of Commons resolution declaring Quebec a "nation" within Canada. I find this to be sophomoric and sad, as this is another blow to the unity of Canada as it is currently construed.

This ultimately can be seen as an assault on the equality of all Canadians under the law. Some court, or Quebec politician will use this resolution to obtain special benefits at the expense of all other Canadians. But the larger question is, if Quebec is a nation, why stay in Canada? They is no compelling reason for them to ultimately stay. If you are a nation, then independence is logical conclusion. Second, if I'm an Albertan, why am I not a nation? I think they have more of a case to be made that they are just as "distinct" as Quebec, and entitled to the same perks as Quebec.

Bad politics, bad precedence.