Stealth equalization

One of the lessons that economists are taught is not to equate correlation with causality.   For example, there may be a strong correlation between wealthy people and Italian shoes but that doesn’t mean that wearing Italian shoes will make you wealthy.

Take this new report on ‘stealth’ equalization.  The report’s author finds that the federal government spends more money in Atlantic Canada – per capita – than in Alberta.  Then he concludes:

The bottom line, Mr. Eisen said, is that “have-not” provinces are “trapped in a situation of low-level private-sector dynamism,” essentially “propped up” by massive government employment that saps the young, talented workforce.

Now, this conclusion may be true – but there is no way he can conclude this from the data.  The study does not prove any causality between federal spending in Atlantic Canada and a ‘low level of private sector dynamism’. 

It’s intellectually lazy.

I suspect the economic situation in Atlantic Canada – now really the Maritime Provinces because Newfoundland is a ‘have’ province – is based on a far more complex equation driven by a variety of variables.  It seems to me the higher government spending here is an effect rather than a cause of a chronically weak economy. 

I have said it before that government has stepped in and tried to prop up the economy in this region with more spending to make up for weak private sector growth.

Sound familiar?  It should because that is what every country in the OECD did in the wake of the economic downturn.  It was called fiscal stimulus.  When we do it nationally, it’s good economic policy. When it is done in New Brunswick, it is bad economic poicy.

But the journalist in this story got my point across.  The real issue is what is the right policy framework that would lead to economic development in the Maritimes?    Because if someone in Alberta is suggesting we should accept our fate and watch our region wither and die – that is unacceptable.  It is just as unacceptable as if Alberta was asked to accept its fate and die.

She missed one little point in the article.  I said that I had been watching politicians and community leaders in Atlantic Canada play the victim card for 20 years and it was kind of fun to watch western Canadian politicians playing the victim card.   

Richard Currie talked about the rich uncle – what does it say about the rich uncle when he is bitter and resents the poor nephew and wants to impoverish him even more?

Now some in the West say they are genuinely interested in their Maritime cousins and their demands to reduce equalization are meant to help us get off the hind teet and unlock our entrepreneurial spirit.   

I’m ready to test that theory.  Let’s have at it.  Why doesn’t the federal government partner with the NB government on a brand new economic development agenda that includes tax breaks for targeted industries (like the oil sands in Alberta), massive investment in R&D in targeted sectors (the feds spend less on R&D in New Brunswick than any other province), the attraction of global companies to New Brunswick (why don’t you go and check how many of the multinational firms attracted to Canada with the help of the federal government have ended up in New Brunswick over the last 20 years – I’ll give you a hint – it starts with z) and an overall commitment to helping New Brunswick build its own tax revenue generation capacity to limit its exposure to transfers.

How about that?

Last point.  If we are in the stealth business, here are a few tidbits to consider:

*$4 billion in federal agriculture subsidies to Alberta – 90% more than New Brunswick – stealth.

*It costs New Brunswick $40,000 to pay for the university education of a single New Brunswicker and something like $100,000 to pay for their entire education k-university  – who promptly moves to Alberta – NB is subsidizing Alberta’s educated workforce.

*Several studies have shown that federal tax breaks to Alberta oil & gas producers have been worth billions in recent years.  The feds have no tax breaks for New Brunswick’s growth industries.

*There are dozens of federal programs -such as the biofuels funding – that are biased towards western Canada and pour hundreds of millions in subsidies into that region.

I wonder if all that is sapping their economic development potential?

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9 Responses to Stealth equalization

  1. Chris Baker says:

    I think you have done an excellent job of exposing the shoddy, ideologically driven research being offered by the Frontier Institute on Public Policy. This clone of the Fraser Institute, like its siblings across the country, has a clear mission to discredit the Equalization Program and other elements of the social safety net. We can have an honest debate on the need for these programs but lets dispense with the phoney research.

  2. mikel says:

    This is what I mean about it being unfortunate that there can’t be more organization here. Richard talks about ‘evidence based’ science in public policy. Perhaps Andy Scott’s little school will do something here, but I doubt it (they got almost half a million in funding yet I can’t find their website, it isn’t even listed when you do a websearch!)

    Stuff like this comes out and there is simply no way to counter it. If it were any other paper but the NP I’d send a reply, but the NP wouldn’t even bother printing it.

    But if this is what comes across as ‘research’, then its very much like Richard says, just biased garbage really. For statistics, they only use ONE table. I’d check out their numbers but finding the employment data for JUST New Brunswick costs $666 dollars.

    However, I did some research and found that APEC shows far fewer federal employees than their table shows. According to the study, 2655 per 100,000 are federal employees, whereas APEC only sites 2200. That puts them not much higher than NFLD.

    Strangely enough, the data is from 2007, and NFLD was still receiving equalization then. So how do you explain the data that shows NFLD and Ontario are virtually identical in federal employees per 100,000? And since NFLD has since boomed into a ‘have’ province, obviously equalization has had NOTHING to do with it.

    Next, you just have to love the jargon. Since there are more federal employees per capita in the poorer provinces, these are called “inefficient” and “bloated”. But what if the other provinces just aren’t lobbying the government hard enough? In fact the author even concedes this at the end of the study by giving a chart showing how much more federal money would be coming in IF they were the same as equalization receiving provinces. So their beef should be with the feds. Of course as David mentions, when the feds cough up billions to bail out the auto sector (another word for the ‘manufacturing’ sector) in Ontario, then its not considered ‘systemic’. When they spend billions to bail out Alberta for mad cow, its a ‘one time cost’ which doesn’t show up in long term statistics. They aren’t ‘federal jobs’, they are just a cheque that is cut to specific industries.

    Finally (for now), and most importantly, is that the term ‘federal jobs and wages’ is not as simple as it sounds. For one thing, a soldier is a federal employee. Now, say what you want about the military, but the ‘services’ I get from a local soldier is VERY different than I get from a postman or a research scientist. In the case of Veterans Affairs, most of the population doesn’t get ANY ‘service’-they service veterans across Canada.

    On the point of the military its worth pointing out that fully one third of the federal employees in NB are military-16,000 federal employees, vs. 6000 military. In Nova Scotia its even more interesting, they have almost TWICE the number of military as New Brunswick, and surprise surprise, the 10,000 military in NS is even LARGER than Alberta’s contribution. And as you may have noticed from soldier obituaries from Afghanistan, the majority of these are from EASTERN Canada. So while Albertans get oil money, easterners are dying (a bit melodramatic but you get the idea).

    It’s also interesting that they make the point that this is “capital leaving” the wealthier provinces. Now, why is this a concern? If this is such a concern then they should be adamantly opposed to free trade, because FAR more capital leaves Alberta in oil revenues and international acquisitions than goes to equilization, which as David points out, educates a percentage of its workforce.

    I agree that they are right in some respects. There is less emphasis on science, because there are no science jobs. But the idea that somehow ‘business is not welcome’ to a have not province that has amongst the lowest corporate income tax rate, the fewest regulations, and a budget where corporations contribute very little, seems a little far fetched. They should be supporting policies that brings some of that Alberta private capital over to the east, that way it would be less equilization necessary.

    But as mentioned, this is just a BAD study. The conclusions simply don’t follow from the data. All that the study shows is that SOME provinces have a higher federal employee rate than others. If they are kiboshing Davids statement on the basis that “Manitoba has a similar population to Saskatchewan”, then they also have to admit that Newfoundland’s statistics (and Quebec’s to a lesser extent) kills THEIR theory as well.

  3. richard says:

    ” Why doesn’t the federal government partner with the NB government ”

    But they do partner on some things – like making EI easier to obtain for workers in certain sectors. Trouble is, they don’t partner where it matters to the kind of strategy you are suggesting. I think that is largely NB’s fault; the feds don’t pay that much attention to the Maritimes as a rule so they can’t be expected to put offers like that on the table – might just invite bad press. Its the provincial govts in the Maritimes that need to put together the strategy, take it to Ottawa and make it an electoral issue.

    The local govts here have to take the leadership – no point in waiting for Godot (or Harpo, in this case).

  4. Scott says:

    Good stuff, David. I was [also] glad to see Professor Murrell debunked this poorly thought out effort from frontier. And he’s not exactly a huge friend of activist government policy when it comes to the economy. Anyway, I think it’s high time someone in our neck of the woods wrote a book exposing this divisive line coming from the national media that we are all just a bunch lazy bums living off government jobs and subsidies(brought to you by the redistributed wealth/revenue from the west). There’s more to it than that.

  5. I agree with Chris Baker – it’s good to expose the intellectually dishonest work of the Frontier Institute and its ilk.

    But you need to get over the bee you have in your bonnet about students getting educated here and then moving. This is is no way a stealth subsidy (it’s only a subsidy if the government does it; you can’t start interpreting the actions of individuals as government subsidies). And in any case, it is a benefit as much to (if not more to) the parents, who would otherwise be on the hook for an out-of-province education. Universities are part of the cost of having children, and it’s not a dead loss if the children move away after. We should be making up for that loss by attracting highly educated individuals from elsewhere. But the only ‘immigrant’ that seems to matter to any of the people around here are the expatriate children of people who were born here.

    I was born in Quebec, raised in Ontario, educated in Alberta, and am working here. It’s the 2010s. People don’t live in just one place any more. Get over this. It’s not a loss if we take part in the global circulation of people and ideas.

  6. I was just pointing out that various social costs are covered by different provinces – it’s not as simple as some people make it out to be.

  7. richard says:

    “We should be making up for that loss by attracting highly educated individuals from elsewhere.”

    The problem is not, as others have pointed out, emigration from NB. The problem is the lack of immigration to NB. There are plenty of ABers in Toronto, but AB has a huge amount of economic opportunity that attracts more than enough replacements. You have to ask why NB cannot attract immigrants to the same degree. The answer is pretty clear – historically, immigrants go where the economic opportunities are greatest. That was true 100 years ago and its true now.

    The issue is how to create those opportunities most efficiently. One approach is to increase investment in R&D. The resulting innovations provide opportunities to attract investment capital and spin-off industries. Those opportunities would attract immigrants, specifically those immigrants with capital to invest and/or who are highly-trained to develop those innovations.

    “I was born in Quebec, raised in Ontario, educated in Alberta, and am working here.”

    I’d be more impressed if we had large numbers of people in the private sector who could say that. Instead, because of public expenditures, fueled by equalization, in things such as health care and the farming out of federal labs (doing things that are largely unrelated to our actual needs) we have seen an influx of public sector workers from various parts of the world. What we do not have is a private sector that has been equally expansionary. We need to create mechanisms that would fuel that private sector growth, especially those private sectors that create high-wage jobs.

  8. mikel says:

    Immigration is a complex issue. For example, I remember Alec Bruce saying a long time ago that many of the executives at McCain fly into work from around the world. I know that at the Irving refinery there is a VERY large segment of the workforce that flies up from down south-and this is a time when NBers are out of work-but they aren’t ‘immigrants’.

    This seems to be changing a bit. There was a report on several new researchers in Moncton, but sadly the interviewer felt the need to say “this is kind of rock bottom for research…what would make you want to come to Moncton?” Which is an odd thing to ask, Moncton is just as equipped as ANY place.

    And when Andy Scott started his social policy research network, the province quickly threw in 200 grand, and ALL the universities added to that. So again, it is unfortunate some of the brainy people HERE can’t start a similar organization. Clearly from their website its not nearly as difficult as some think. David’s comments are generally more researched and less biased than the report we are talking about here.

    Just one more comment, if you haven’t read the 24 page study which has a total of FIVE footnotes, you should. For example, it also has a link to a ‘study’ from last February “The REAL Have Nots of Confederation: British Columbia, Alberta and Ontario” (altho thats literally true of Ontario now:) I think Ralph Nader’s quote about corporations is fitting in describing these three: “these guys go around complaining about how their glass is only 98% full!”

    Anyway, the one GLARING comment I had to comment on is a footnoted line in the study that says “Credible estimates show that in total, between $40-billion and $50-billion dollars are transferred from high-productivity jurisdictions to low-pro- ductivity jurisdictions in Canada”

    For the ‘credible evidence’, there are two footnotes, the first to an op ed piece in the Winnipeg Free Press, the second is to another ‘study’, both of which are written by employees of the same research institute (this one). However, the ‘study’ that it is footnoted to doesn’t even say anything of the kind. There is NO ‘evidence’ let alone credible evidence at all. A lot of these guys just expect that nobody ever checks their sources-although they are trying to get around that by having almost NO sources. I don’t think I’ve seen a study with so few footnotes in a long time.

  9. Marcel says:

    @richard

    I agree with your comment richard. Private sector is non existent in the maritimes. It mostly only exist as a supporting industry to all the public Federal funded jobs.

    Until we find a way to have strong private sector jobs the maritimes are doomed to experience the same dismal economic performance. The question we need to answer are the following: Are there any economic comparative advantages present in the maritimes? What are the public policies that could be applied to support our comparative advantage?

    On the same note, there is always the issue of Human Capital. There is a serious problem when everyone with high ability either leaves the provinces or ends up working for the federal government. This is not a model for economic development.

    Marcel

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