A kind of vindication of my view on Equalization?

I have always thought that Equalization was holding back the economic development potential of New Brunswick.  I believe the same thing about EI.  It’s easier for the feds to cut a cheque than it is to work with the province on a long term vision for economic development in a place like New Brunswick.   However, when I used to discuss this here and in columns I was told that my views were confused.  One NB university economist directly rebuffed me saying that Equalization had “nothing to do with economic development”.  The following is from a thoughtful paper by former BoC head David Dodge on Equalization and transfers:

However, transfers can also play a counterproductive role if they act to mask inexorable structural change, delay necessary adaptation and create the illusion that the unsustainable can somehow be sustained indefinitely. Ultimately, they can destroy unity by creating resentment, disrespect and distrust. In the long run, unions can be sustained only when all members are able and willing to fully participate and contribute to the union.

Equalization is a zero-sum game of income redistribution that increasingly generates more resentment than satisfaction. Adopting some or all of these technical changes to the equalization formula may mitigate the problem but will not be a sustainable solution to today’s unprecedented challenge – a challenge that is not cyclical and destined to quickly disappear, but structural and longer-term.

We believe the “solution” lies elsewhere: we need to focus less on the equality (or comparability) and more on the quality (or adequacy) of public services; less on federal transfers that redistribute income to “equalize” fiscal capacity, more on federal investments that will create more income and build the fiscal capacity of today’s lower-income provinces. We need policies that promote positive provincial convergence and the development of competitive manufacturing and service industries, and that also reflect the practical reality that Canada’s economic prosperity and political equilibrium ultimately depend on the economic strength of all provinces, especially populous Ontario.

In short, we need to think and look outside the equalization and transfers box, outside the narrow confines of subsection 36 (2) of the Constitution Act, 1982, and look to the broader economic objectives of subsection 36 (1).

 

Of course, Dodge inserts “especially populous Ontario” because just about no one cared about this stuff until Ontario joined the have-nots.  Now it’s front page news.

It’s no secret that New Brunswick’s economy and society has sputtered along for far to many decades.   It has become the poster child for transfers – Equalization and EI alone generate $2.6 billion worth of revenue for New Brunswick ($3,500 per person).

Unlike my economist colleague, I prefer to have bring economic development directly into the conversation about Equalization.  I’d like to see long term strategies to reduce Equalization – joint fed/prov – with milestones, investment targets, immigration, etc.   As Dodge says, “Canada’s economic prosperity and political equilibrium [key point] ultimately depend on the economic strength of all provinces”.

It’s long overdue.

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8 Responses to A kind of vindication of my view on Equalization?

  1. Rupert Penjab says:

    WELL, David, you are about to get your wish: no (or very limited) Equalization, or EI, but I would not hold my breath either about “the feds working with the province on a long term vision for economic development”, I’d bet that isn’t going to happen either.

    There HAS to be a reason the RCMP has bought armored personnel carriers?

    http://blogs.ottawacitizen.com/2012/07/24/rcmp-receives-mxt-armoured-personnel-carriers-from-navistar-defence/

  2. Just so we are clear. My wish is for a stronger and more prosperous New Brunswick. If deep cuts to federal programs make things worse it will make the situation that David Dodge is concerned about that much worse.

  3. Richard Reeleder says:

    @David Campbell
    “If deep cuts to federal programs make things worse it will make the situation that David Dodge is concerned about that much worse.”

    Is there ANY evidence to believe that the feds are interested in replacing transfers with e.g. increased R&D investment or strategic investments of some sort? In my opinion, no.

    The recent angst over transfers has little to do with getting the NB economy moving forward and nearly everything to do with freeing up federal dollars to either pay for future tax cuts or reduce the need for federal tax hikes.

  4. Rupert Penjab says:

    Just so that we are clear: My wish is that EVERYONE in NB is healthy and has the opportunity to earn a decent living.
    I do not see this happening until the government gets out of business, and conversely, business gets out of government.
    The government can’t spend what it doesn’t have and should stop “gifting” to the select few.
    If a thing is worth doing it should be able to stand on it’s own merits.

  5. We have two choices. Either we push for a new approach or we watch fed transfers slowly whittled away (as a percentage of total spending). I prefer the former. The gifting business, as I have said ad nauseum, is a national – and even international problem and I am not about to call for NB to unilaterally disarm. If a good company is looking at NB and some other jurisdiction brings out the cheque book, I think NB should also bring out the guns – if there is a clear, short term payback on the investment in the form of new tax dollars. But I realize a large percentage of folks can’t get over this hurdle and would rather stand on principle. I respect that position but don’t agree with it.

  6. Richard Reeleder says:

    “My wish is that EVERYONE in NB is healthy and has the opportunity to earn a decent living.
    I do not see this happening until the government gets out of business, and conversely, business gets out of government.”

    Where in the world has this approach been practised and shown to work? I ask because there are many jurisdictions where direct and indirect govt investments have been shown to drive economic growth. As Mr Campbell has said, the important thing is that there is a positive ROI, not who is doing the investing.

    It’s fine to have a principled stand, but when it is contradicted by historical data, one wonders if that stand has real merit or is just a product of wishful thinking.

    The feds certainly could phase out transfers and replace those with other types of investment (e.g. R&D) that might lead to sustainable levels of growth. I see no evidence that they will do so, however. Thus I see calls for the transfers to be phased out and replaced with ‘something’ to be a dangerous and naive suggestion.

  7. mikel says:

    Lets just say it. David Dodge is an idiot. These are Fraser talking points, nothing more. It is all about income redistribution, and the fact is, Fraser simply wants corporations to have all the income.

    The comments don’t even make sense. You’ve got five kids going to the store. The kids are friends, but two of the friends have lots of money, one has average, the other two have little. The equalization route is simple-the kids split the money, and everybody gets a bit of candy, everybody is happy, and all the kids stay friends. The alternative is what David Dodge suggests-that the wealthier kids use their money to ‘smarten up’ the kids who are poor, and (it is assumed, but not said)help them make more money so they all will have more. This is all because the theory is that the group is only happy if the richer kids don’t have to share.

    I could labour that metaphor for days, the parents are obviously the natural resources which ‘give’ the money in the first place, and I don’t know about anybody else here, but I was ALWAYS happiest sharing what loot I had, and I never begrudged it, even if I was earning it and not given it.

    Equalization and EI were NEVER meant to ‘redistribute wealth’, they were only meant to help poorer areas match the government services of wealthier ones. There is no federal program to build decent Vietnamese restaurants in Fredericton. Or keep a symphony going in Moncton. And EI is simply a stopgap. The ONLY reason we hear about it is a failing in its regulations-that people in places that have fewer jobs have an easier time collecting. Again, NOTHING to do with income redistribution.

    Again, our local Perimeter Institute for Quantum Mechanics is a privately funded think tank that produces NOTHING marketable. Yet it gets more federal investment than ALL of New Brunswick. So Harper is simply LYING when he says its about marketability, and never about location. There is NOTHING stopping the feds from investing in New Brunswick. They don’t have to cut equalization, or change EI. But what we’ve seen is the government AXING investment in NB, and axing its workforce.

    So its ridiculous to see these comments as ANYTHING other than “your poor and we don’t like giving you money”. Economists love to wrap things in jargon so they look impressive, but it is really gibberish. If David Dodge REALLY wanted to ‘focus less’ then he wouldn’t be talking about it. What he means by ‘focus less’ is GIVE less. And anybody that thinks THAT doesn’t create disharmony doesn’t know much about the ‘union’ they are living in.

    By all means, ‘focus less’ on equalization and set up research and market organizations in all these areas with high unemployment. Give as much money to Richibucto as you give to Perimeter, and THEN see what happens to EI and whether equalization is needed as much. But like others here have said, if you REALLY think that is David Dodge’s, or anybody else’s plan, dude, you really gotta go back to school.

  8. Interesting blog David! I feel we most likely see eye to eye on many matters. I arrive at your blog today after sifting through some old boxes which were to be sent to me in Edmonton in January, but never got sent. I am now in NB for the next 7 months and came across a commentary you wrote in January regarding the level of NB exports, the # of exporters and the lack of diversity of the markets we sell to.

    For me, the answer to our economic woes lies within this internationalization piece. The capacity and ability is there, the motivation and drive is not. This is where I agree that EI and Transfers do not help NB innovation or “let’s do something different” attitude.

    I am hoping to change a bit of that, with those who are willing. I hope to uncover some SME’s who have the “let’s do this!” attitude. I want to help them become competitive, export ready and be widely successful in markets they may not have heard of before.

    Like you, I am sometimes seen as a renegade, as I refuse to agree that the US market is the first place a company should expand to, nor do I agree that it is the easiest “first step” for a new exporter. I actually feel the opposite.
    Despite culture differences (which can actually add to a NB company’s competitive edge!), with a bit of knowledge and risk mitigation tool, West Africa could be a much quicker return on investment than trying to tackle the US.

    I’ll follow you on twitter!

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