Among the “real change now” promises of the Liberals is to make a substantial contribution to reduction of Canadian greenhouse gases, to break with the Harper tradition of climate change scepticism and the Chrétien-Martin era of climate change symbolism without substance. Given that the UN is convening the next major conference on climate change at the end of November, Trudeau’s government cannot ignore this file.

To date (writing in late October), Trudeau is relying on the fragile interprovincial dynamic that emerged over the last year. The provinces have agreed to let a hundred flowers bloom: some will undertake explicit carbon taxing; some will join interstate/interprovincial markets in emissions trading; some will enact tougher sectoral regulations; some will subsidize green innovations. Trudeau has invited most of the Canadian political elite to join the Canadian delegation in Paris. Invitations have been extended to Tom Mulcair, Elizabeth May and interim Tory leader Rona Ambrose, to the premiers and to leaders of national environmental groups.

Relative to Harper’s legacy, this is an improvement. And it is natural, in the postelection honeymoon phase, to hope that love will triumph over self-interest. Maybe the fact that summer 2015 was the hottest on record will help. It generated unprecedented forest fires across northern and western Canada – here in Vancouver smoke from the fires intermittently interfered with the pleasure of a Starbucks latte on a thousand outdoor patios. However, being a practitioner of the “dismal science” (economics), my instinct is that love will not triumph; “real change” requires “real change” in financial incentives.

Immodestly, I invite readers to dig up my editorial in the last issue of Inroads on the Tories’ two “big ideas.”1 The first of these ideas was to turn Canada into a low-tax country. They succeeded. In terms of taxing effort, Canada fell over the last decade from its rank as a typical OECD country to its present rank at the bottom quartile (three quarters of OECD countries tax more aggressively). For the time being, Canadians still subscribe to this first idea. The evidence? During the election campaign, the Liberals championed a personal tax increase for the “1 per cent” but accompanied it with an offsetting cut for the “middle class.” To offset its tax-and-spend reputation, the NDP promised balanced budgets subject to a modest corporate tax increase. It is an understatement to conclude that these were timorous responses to an honest discussion of tax increases to pay for new programs or for the inevitable health care cost increases to provide for the aging boomer generation.

The Tories’ second big idea was that Canada become the Saudi Arabia of North America through aggressive development of its vast hydrocarbon resources – greenhouse gas emissions be damned. That the Tories failed to realize this second goal is due not to Canadians’ collective conversion to sustainable development somewhere on the road to the UN gathering in Paris. They failed because the Saudis decided in 2014 to maintain their world market share in oil exports. They did not restrict output to maintain oil prices in the $100-a-barrel range. At $50 a barrel, most of Canada’s ambitious tar sands, liquefied natural gas and international pipeline projects were not financially viable. As corporate executives cancelled planned investments and laid off workers, Canada entered into a mild recession in 2015. As an aside, had the Saudis not cut world oil prices in half, would Stephen Harper still be prime minister?

It is a measure of the Tories’ success in realizing this second goal that the Liberals and NDP were ambiguous in discussing future oil and gas developments, and their proposals for new climate change policy are long on process, short on substance.

From the “dismal science” perspective of climate change modelling, a financial incentive of sufficient magnitude to reduce Canadian emissions substantially – say, 80 per cent reduction by 2050 relative to “business as usual” projections – will require a carbon price that rapidly ramps up to $200 or $300 per tonne of CO2 equivalent. That is a rate seven to ten times higher than the present British Columbia carbon tax. If this carbon price increase came about via a carbon tax, it would coincidentally raise Canada’s taxing effort by two percentage points of GDP, would raise about $40 billion annually and would restore Canada to the middle range of OECD countries in terms of taxing effort.

During the election campaign, not even Elizabeth May talked about a $40 billion annual tax increase. Maybe love will prevail … Continue reading “Climate change policy: Will love prevail?”

Emma Sky, The Unraveling: High Hopes and Missed Opportunities in Iraq. New York: PublicAffairs, 2015. 400 pages.

It is easy to dismiss Emma Sky as a romantic reincarnation of the eccentric British diplomat and Arabist Margaret Bell, who played a major role after World War I in the creation of the Iraqi state from remnants of the Ottoman Empire. From the beginning, Iraq was an unhappy multicultural state; so it remains a century later.

Sky is the most unlikely of policy wonks. A petite Oxford-educated Arabist with liberal politics, she became the chief political adviser to Ray Odierno, the hulking U.S. general whose troops managed to tamp down the vicious Iraq civil war in the years 2007 to 2010. Her thesis is straightforward. America displayed unbelievable incompetence in planning the invasion in 2003. More so than the politicians, the senior U.S. military commanders learned from their mistakes. From 2007, they waged an effective counterterrorist campaign that, by 2010, created a social and political environment much superior to the tyranny run by Saddam Hussein. Unfortunately, in the rush to exit, the Obama administration “unravelled” the military achievement. Obama’s administration – in particular, Joe Biden, Hillary Clinton and Chris Hill, Clinton’s choice as ambassador to Iraq – comes in for blunt criticism. It is as responsible for the present chaos as George W. Bush, Donald Rumsfeld, Tony Blair et al. are responsible for the chaos in Iraq in the years following 2003.

This is a memoir to make both left-liberal pacifists (from Thomas Mulcair to Jeremy Corbyn) and interventionists (from liberals such as Michael Ignatieff to neocons such as David Frum) squirm. It is part of a modest revisionist trend to look again at the role of military force in the context of deeply dysfunctional political regimes – of which Saddam’s Iraq was undoubtedly one. The major motivation for revisionism is, of course, the Syrian civil war and emergence of Islamic State, whose ramifications now reach across the Middle East and Europe. I happen to be in Bangladesh as I write. It appears that the tentacles of Islamic State may have reached here. This week (late September) a group of jihadists gunned down an Italian NGO worker while he was jogging in the diplomatic neighbourhood of the capital and, a few days later, a Japanese businessman growing herbs on a commercial basis in northern Bangladesh. Islamic State has claimed credit, saying all citizens of crusader nations are legitimate targets.
In 2003, Emma Sky was innocuously working for the British Council, an organization dedicated to promoting British literature and education throughout the world. An official email invited volunteers to work in Iraq. She accepted. The British in Basra had no job for her. She went north and ultimately offered her services to the colonel in charge of Kirkuk.

Iraq can be compared to Yugoslavia as a contested meeting ground of religious and ethnic communities with a history of mistrust. Hussein was a more vicious equivalent of Tito. Upon the removal of both dictators, their respective countries degenerated into civil war. The Kirkuk district was particularly prone to conflict. It contained not only a mix of Shia and Sunni Arab, but also many Kurds and significant minorities, such as Yazidis and Armenian Christians whose ancestors had fled massacre in their home country a century earlier. Finally, it contained much of the country’s oil wealth.

As political adviser to the U.S. colonel in charge, Sky honed her skill as diplomat. The two of them put in place an interim governing structure that avoided open conflict. The locals may not have loved the American colonel and his British adviser, but they tolerated them as a major improvement over Hussein’s tyranny. In 2004, Sky returned to her old job in Manchester. She was bored. When came the summons from Odierno, about to take operational control of U.S. military forces in Iraq, she agreed to return as his political adviser.

Over the next four years this odd couple simultaneously waged war and practised diplomacy. As Christopher Dickey wrote in his review of Sky’s book in the New York Times, the situation moved “from horrible to tolerable to seeming really pretty good” by 2010. In Sky’s telling of multiple meetings with Kurds, Shia and Sunni Arab leaders, the heart of “really pretty good” was the skill with which Odierno implemented a sophisticated counterterrorism campaign and Ryan Crocker, the U.S. ambassador, cajoled the mistrustful politicians toward reconciliation.

The climax came with the 2010 election in which several coalitions confronted each other. The two major coalitions were one headed by Nouri al-Maliki, a devout Shia and prime minister at the time, and another headed by Ayad Allawi, a secular Shia and former post-2003 prime minister. Maliki’s coalition was adamantly committed to maintaining Shia dominance of the country, deeply mistrustful of all Sunni Arab leaders and opposed to granting much to the Kurds. Allawi headed the second major coalition. It enjoyed the support of nearly all Sunni Arabs and a fair number of the more secular Shia. In a reasonably peaceful election with a respectable turnout of over 60 per cent, Allawi won two seats more than Maliki. Neither, however, enjoyed a majority in parliament.

Maliki turned to a range of legal and political manoeuvres to prevent Allawi from getting first crack at forming a government. Vice President Joe Biden was point man for the Obama administration. He made it clear that he preferred Maliki, a strong man with a track record, to Allawi, who headed an untested interethnic coalition. For Biden, interethnic coalitions were unworkable. Better to let a tough Shia leader with strong support in the majority ethnic-religious community run the show. Odierno protested vigorously via reports to the Defense Department in Washington that Maliki was too authoritarian, too paranoid to be capable of interethnic compromise, too prone to patronage and corruption and too close to the Iranians. Leaving him in charge risked a return to the civil war of 2004–06.

Events have proved Odierno right and Biden wrong. America’s hasty withdrawal from Iraq has ushered in a second civil war, potentially more murderous than the first. Since 2014 much of the Sunni Arab leadership has rallied to Islamic State. At the time of writing, the U.S. Congress is grilling generals over the inability of Iraqi “boots on the ground” to make headway against Islamic State. Maliki’s disregard for professional merit has turned the Iraqi army into a shell, its officers unwilling to lead and its soldiers unwilling to fight. While the United States has reluctantly rejoined the battle via air strikes, the only effective “boots on the ground” are Islamic State, Shia militia heavily influenced by Iran and the Peshmerga in Kurdistan. Iraq has unravelled.

emma-sky2 emma-sky3

In late April, Joe Oliver, Canada’s current Finance Minister, delivered his first budget. In a nice touch, the budget began with Oliver’s homage to his predecessor: “Our first balanced budget since the downturn is the legacy of a man who steered our nation through the worst economic crisis since the 1930s: my predecessor, colleague and friend, Jim Flaherty.”

We can quibble about the accounting, but essentially Oliver is right: the Tories have balanced the budget despite an unexpected collapse in oil and gas prices over the last year. When, post-2011, the Tories became a majority government, Flaherty had more discretion to follow his instincts. The result is, as the budget announces, the lowest ratio of federal tax revenue to GDP in 50 years. On the other side of the House, claims such as this have prompted Liberal and NDP MPs to predict an end to Canada’s Nordic tradition of a compassionate welfare state.

If you download the budget1 and look at the graph on page 340, you will see that the maximum sustained federal tax/GDP ratio over the last 50 years was about 18 per cent. This was during the years from the late 1980s to the late 1990s when Tory and Liberal governments sought an end to two decades of continuous federal deficits. In 2000, the Liberals lowered tax rates significantly and the ratio fell to about 16 per cent. Since 2008, the Tories have lowered the ratio to 14 per cent – initially in a grudging Keynesian exercise of lowering taxes and maintaining spending during a recession, subsequently in a conservative exercise of constraining spending to match the lower tax revenues.

For many reasons I would like a return to 16 per cent, but there are other more important questions to debate. There is something surreal about Canadian politicians devoting so much rhetoric to the wisdom or error of a two-percentage-point reduction in the federal tax/GDP ratio since the Tories assumed office.

The most important question raised by Harper’s leadership, I suggest, is: do we want Canada to be the Saudi Arabia of North America? Beyond lowering taxes, the “big idea” among Tory leaders over the last decade has been to put an end to eastern domination of Canadian politics by exploiting Canada’s vast energy resources – tar sands in particular. A corollary to this “big idea” has been to label concern with expanding world use of fossil fuels and consequent climate change left-wing paranoia.

That a Calgary-dominated government has sought to minimize climate change as an issue may not be honourable, but is understandable. Less understandable is the timorous criticism by Liberal and NDP leaders of the Tories’ “big idea.” There have been exceptions. Thomas Mulcair made a few speeches in 2012 to the effect that Canada is suffering from “Dutch disease”: excessive resource development, distorted prices and wages and stagnant productivity. When challenged, he backed off. A more notable exception was Stéphane Dion’s “green shift” campaign in 2008. His inability to make carbon taxing a politically palatable subject was due to more than a stilted rhetorical style. The NDP played a disingenuous role. During the 2008 campaign Jack Layton vigorously attacked both Dion’s “green shift” and British Columbia’s recently enacted carbon tax:

Our plan works without taxing your family like the tax Campbell imposed and that Harper approved and that Dion wants to make three times worse. Our plan makes the big polluters pay instead, and it doesn’t tax ordinary families like yours.

This was staggering political opportunism. By 2008 the evidence on cap and trade was clear: it is open to so much manipulation by governments issuing permits that it usually doesn’t work. And if any such scheme is vigorously implemented, the “big polluters” pass on the cost of permits to “ordinary families.” Not content to attack Dion, Layton damned B.C.’s carbon tax, which is now widely credited as the most ambitious initiative to date in North America to introduce emissions pricing.

The post-2008 conclusion drawn by both Liberal and NDP leaders has been to avoid challenging the Tories’ “big idea.” However, for many reasons, this “big idea” is a bad idea and should be challenged.

First, it led to an unwarranted appreciation of the Canadian dollar against its U.S. counterpart, from 65–70 cents in the early 2000s to above par in the early 2010s. As Tom Courchene has argued, speculative expectations of rapidly expanding oil and gas exports created a demand for the loonie beyond economic fundamentals.2 The unwarranted increase in the exchange rate exacerbated the post-recession problem of maintaining manufacturing jobs in the Canadian economy. The decline of the Canadian dollar to 80 cents over the last year is due to the Saudis’ refusal to curtail production and to other geopolitical conflicts over oil and gas exports – not to any rethinking among Canadians of the value of the “big idea.”

Second, the hegemony of the “big idea” has meant that Canada has dragged its feet on the diplomatically difficult task of defining climate change policy. For example, the opposition often criticizes pipeline proposals, but only under the cover of objection by Native groups making land claims or by environmentalists fearing oil spills. What an NDP or Liberal government would do on this file, were either in power, is unknown.

Third, the Liberal/NDP quasi-endorsement of the “big idea” has minimized public discussion of Canadian productivity growth, which has been less than impressive in recent decades. At the core of productivity growth is promoting education success among successive generations. And the foundation of education success is students doing well in Grades K–12.

How is Canada faring internationally in terms of K–12? The best answers to this question come from the Program for International Student Assessment (PISA), the OECD’s international evaluation of math, reading and science knowledge among upper-secondary students in randomly selected schools in more than 60 countries. Overall, Canada fares pretty well in terms of PISA, but its performance has declined over the last decade, both absolutely and in international ranking. And performance across provinces varies immensely. The most precipitous declines have occurred in Newfoundland, Alberta and Manitoba.

Almost certainly, the declines in Newfoundland and Alberta are due to these provinces’ oil-based economies. If – until recently – a teenager could earn $75,000 annually driving a truck to and from Fort McMurray, why struggle with grade 11 algebra? Why finish high school? Not only did PISA scores decline sharply over the last decade in these two provinces, but according to the latest census their high school dropout rates are well above the national average for young adults.

Much of Manitoba’s decline can be attributed to a rising share of Aboriginal students, whose K–12 education outcomes remain very weak. With Aboriginals comprising nearly a third of Manitoba and Saskatchewan school-age cohorts, the productivity and social cohesion of these prairie provinces require that Aboriginal education outcomes improve dramatically. As the controversy over the First Nations Control of First Nations Education demonstrates, improving Aboriginal education is a crucial but politically sensitive subject.3 Liberal and NDP MPs have been absent from the debate.

Fourth, the prospect of easy prosperity from oil and gas exports has coarsened provincial political debate in western Canada and encouraged provincial politicians to evade tough choices. In the early 1990s, Roy Romanow’s NDP government in Saskatchewan inherited the largest provincial debt (relative to provincial GDP) and in its first term raised taxes and reduced spending. The skill with which his government balanced the budget over its first term was such that the NDP was comfortably reelected in mid-decade. Could a western premier repeat such an exercise this decade? In particular, will Rachel Notley be able to do it? I’m not sure.

Saskatchewan Premier Brad Wall has become the most consistent premier in voicing scepticism over climate change. In 2013, B.C. Premier Christy Clark won reelection by wearing a hard hat and promising thousands of construction jobs and billions of dollars in future royalty revenues from liquefied natural gas exports. Admittedly, there is a case for using natural gas as a substitute for coal. If that was Clark’s primary goal, however, she would have been talking to her Alberta and Saskatchewan colleagues on use of B.C.’s gas for the rapid phase-out of their coal-fired power plants. She wasn’t.

This “coarsening” has afflicted not only our politicians but all of us. Albertans have something in common with Greeks faced with the European Union’s post-2008 recession. Both Greeks and Albertans have abandoned the political establishment that prevailed during good times. In both cases the plurality has swung left; a substantial minority has swung right. Jim Prentice deserved to be humbled in Alberta’s recent election. He was among the inner core of Calgary corporate leaders promoting western Canadian oil and gas exports over the last decade. Nonetheless, he was right to insist that Albertans bear collective responsibility for having endorsed low taxes, high public sector salaries and a bloated provincial budget overly reliant on resource royalties.

I don’t want to be merely a curmudgeon. Had I been in Alberta, I too would have voted for the NDP. After four decades, the Tories had become dependent on donations by the Calgary corporate elite. Rachel Notley is a sophisticated politician who, on climate change, has hinted at sensible initiatives – such as expanding the interprovincial power grid and buying B.C. electricity to be generated from the large Site C dam as a means to rapidly phase out Alberta’s coal-fired power plants.

It is too soon to know how the Alberta NDP will govern. Maybe Notley will lead Albertans away from infatuation with the Tories’ “big idea.” Maybe she will display Romanow’s skill in balancing the provincial budget while maintaining services. We shall see.

Continue reading “The Tories’ “big idea””

Kamel Daoud, The Meursault Investigation.
Translated by John Cullen.

New York: Other Press, 2015. 160 pages.

(Originally published in French as Meursault, contre-enquête in Algeria by Éditions Barzakh, Algiers, in 2013, and in France by Actes du Sud, Arles, in 2014.)

Kamel Daoud is an Algerian journalist and novelist living in Oran, Algeria’s second city. His novel Meursault, contre-enquête won many awards in 2014, and came close to winning France’s ultimate literary prize, the Goncourt. It is not too great an exaggeration to say that Daoud is to present-day Algeria what Albert Camus was to France in the mid-20th century.

Some links between the two are accidents of geography. Both were born in Algeria, Camus to a poor pied noir family in Algiers, Daoud to a policeman. Both were the first members of their families to advance academically. Both had careers as journalists. For many years Daoud has been a columnist for the French-language newspaper of Oran.

More fundamentally, both aspired to force their fellow citizens to face their political and moral contradictions. For Daoud, “Algeria is a country squeezed between heaven and earth. The land belongs to the ‘liberators,’ this vile cast that does not want to die, and which claims to have conducted the on our behalf. And heaven is colonized by the Islamists, who have taken it over in the name of Allah.”

Meursault is a stinging denunciation of the collapse of the ideals of Algeria’s leaders into the present-day reality of a corrupt militarized bureaucratic state, led by Abdelaziz Bouteflika, a 78-year-old veteran of the guerrilla war against the French. Equally, it is a stinging denunciation of the imams who represent the only viable opposition. In the novel’s conclusion, Daoud’s alter ego observes the local mosque, visible from his apartment: “I detest the imam who perceives his flock as if he was a royal intendant. The mosque has a hideous minaret, which brings out my desire to blaspheme: ‘I will not prostrate myself at the foot of a pile of bricks.’”

18_Kamel_Daoud_2015The contre-enquête of Daoud’s novel begins as a critique of Camus, the pied noir. In the climactic scene of Camus’s L’étranger, Meursault, the novel’s central character, is on an Algiers beach on a blindingly hot summer afternoon. His life is meaningless; he is adrift; he sees an Arab, unnamed in the novel, holding what might be a knife. Meursault shoots and kills him. He is prosecuted and executed. He offers no legal defence and vehemently denounces the priest who comes to his cell in search of Meursault’s confession.

The central character of Daoud’s novel is Harun, brother of the unnamed Arab murdered by Meursault. Harun criticizes Camus who, allegedly like all pieds noirs, thought Arabs not worthy of being fleshed out as complex characters in a novel. Adding insult to injury, Camus did not even deign to name Musa, Harun’s long-dead brother.

In Meursault, Daoud drags the reader into an unsettling literary universe, an Algerian mirror of Camus’s critique of bourgeois life in post–World War II Paris. Not content to use L’étranger as catalyst to motivate the story, Daoud pays homage to Camus by copying the structure of the most perfectly crafted of Camus’s novels. La chute is a first-person confession by Jean-Clémence, a formerly comfortable Parisian, conducted in an Amsterdam bar for the benefit of a stranger – you the reader. Starting with the protagonist’s name (whose initials are J-C) and the title, the novel has obvious Christian references.

Dostoyevsky was one of Camus’s literary influences. Would Camus have copied Dostoyevsky’s evolution, from a radical youth in the 1840s to a mature novelist sympathetic to the Russian Orthodox Church in the 1870s? Perhaps. But a few years after publication of La chute, Camus and his editor died in a car crash. Although probably not in a car crash, Daoud’s career may also be abruptly snuffed out – either in one of Bouteflika’s prisons or at the hand of some religious extremist.

The confession in Meursault is that of Harun. In a bar somewhere in Oran, Harun confesses to an unnamed literary researcher who has tracked down the brother of Meursault’s victim as part of his research into L’étranger. In the course of the confession Harun admits that he, like Meursault, has committed a pointless, unjustified murder. The day after peace was declared in the Algerian independence struggle, he killed a pied noir cowering in the family barn.

Meursault is a demanding novel. To appreciate it fully, the reader should be simultaneously familiar with Camus’s intellectual concerns and with the political history of Algeria. That makes for a small audience. Furthermore, until now it has been available only in French. Most Algerians do not read French, which is probably the reason Daoud is free to write. Most of the French have lost interest in Algeria. In North America, few understand French.

Nonetheless, Daoud’s first novel is a tour de force. Daoud has antagonized Salafist imams in Algeria. He is subject to a fatwa. He has excited the Parisian literary elite, as is evident from his near-win of the Goncourt. Recently, he achieved the honour of a lengthy profile in the New York Times Magazine.1 The New Yorker published an excerpt from Meursault in English on April 6. The novel is due out in English translation in June.

Continue reading “A country squeezed between heaven and earth”

Ottawa’s reform legislation falls victim to competing agendas

Ottawa published two major Aboriginal policy reviews in the 1960s. One was the infamous “White Paper” presented to Parliament in 1969 by Jean Chrétien, at the time Minister of Indian Affairs in Pierre Trudeau’s first government. It recommended abolition of the Indian Act and phasing out of reserves in favour of complete integration of First Nations into Canadian society. The White Paper served as a foil for Harold Cardinal’s “Red Paper,” an early statement on behalf of indigenous autonomy and an expansive interpretation of treaty rights.

The other document, now largely forgotten, was a more nuanced review. The Hawthorn Report, named for the study’s director, Harry B. Hawthorn, insisted that policy not be directed at assimilation (“the research on which the Report is based was not directed to finding ways in which Indians might be assimilated”), but it also insisted “that individuals be given the capacity to make choices which include the decision to take jobs away from reserves, play a part in politics, and move and reside where they wish.”1 Central to Hawthorn’s vision was expansion of the capacity of individuals, which required provision of high-quality on-reserve social services. Hawthorn predicted that once health care and schools of decent quality were available, many reserve residents would choose to leave the reserve and participate in mainstream society – as equals with other Canadians. He acknowledged that many would not make that choice, and that living on-reserve was an equally valid option.

Bill C-33, the First Nations Control of First Nations Education Act, tabled in Parliament in the spring of 2014, was the product of a tempestuous three-year reform project intended to provide a legislative basis for reserve schools across Canada. Over the half-century since Hawthorn wrote, apart from providing cash transfers to reserves, Ottawa has played a very limited role in K–12 education. Since the 1960s individual First Nation councils have, with exceptions and qualifications, managed their respective schools on a stand-alone basis. In effect, Bill C-33 took up Hawthorn’s challenge to make reserve-based social programs – schools in this case – of sufficiently high quality that First Nation youth would have “the capacity to make choices.”

Bill C-33 was a compromise drafted by the Department of Aboriginal Affairs (AANDC) with the active participation of Assembly of First Nations (AFN) leaders. The provisions of the legislation are pragmatic and, it can be argued, would make First Nation control of their schools more effective. On the other hand, Bill C-33 can be interpreted as an infringement of the absolute treaty right of individual First Nations over education. Such was the case made by Bill C-33’s opponents, who argued in the tradition of the Red Paper. The resignation of Shawn Atleo, AFN National Chief during the previous three years, and the subsequent withdrawal of Bill C-33 illustrate the difficulty of reconciling the Hawthorn and Red Paper agendas.

The census evidence

Relative to the tragedy of residential schools in the first half of the 20th century, policy since 1970 has obviously been an improvement. But it has not lived up to expectations. The gains in education have disproportionately accrued to First Nation individuals living off-reserve and Métis. While education outcomes for these two groups should not invite complacency, they are far superior to those among First Nation members living on-reserve.

The importance of high school completion in predicting whether someone avoids poverty over his or her lifetime is hard to exaggerate. While it is a low rung on the education ladder, it remains the crucial rung for getting a job. Whether someone is identified in the latest census (conducted in 2011) as North American Indian / First Nation, as Métis or as non-Aboriginal, the probability of being employed was below 40 per cent if he or she lacked high school certification.2 For the three identity groups, it jumped by over 25 percentage points for those with high school certification but no further education. At higher education levels, the probabilities of employment converged for the three groups, and for those with university degrees they were all above 75 per cent.

6_figure 1

Figure 1 illustrates high school completion profiles for four groups, by four age cohorts. Ages 20–24 is the youngest cohort to expect high school completion. The statistics are derived from the 2011 census; hence those in the oldest cohort illustrated were born prior to 1965 and all but a few of those who completed high school can be expected to have done so before 1980. Within the non-Aboriginal population, over one in five of those age 45 or older did not complete. For the three younger cohorts high school completion is roughly constant, at 90 per cent. This profile illustrates that, for non-Aboriginal adults below age 45, near-universal high school completion has become the norm. The analogous profile for Métis tracks that for non-Aboriginals, but is roughly 10 percentage points lower for all cohorts.

The story among First Nation cohorts is more complex. Their maximum high school completion rates occur at middle age (the age 35–44 cohort). The middle-age off-reserve high school completion rate approaches 80 per cent, not far below the analogous statistic for Métis. For on-reserve First Nations the middle-age completion rate is well below 60 per cent. The completion rate for the on-reserve age 20–24 cohort is only slightly above 40 per cent. This cohort will presumably increase its education credentials as it ages, but its present high school completion rate is below that for its parents’ generation (age 45 or older).

6_figure 2

National averages hide substantial provincial variations. Figure 2 illustrates provincial high school completion at ages 20–24 for the four groups in six provinces, Quebec to British Columbia. Collectively the six provinces include nine tenths of the Aboriginal-identity population. The data are presented here as deviations from the national averages for ages 20–24 illustrated in figure 1. Immediately evident is the superior on-reserve result in B.C. Ontario is 10 points lower; Saskatchewan is 17 points lower and close to the national average; the remaining three (Alberta, Manitoba and Quebec) are at least 25 points lower than B.C.

The present “non-system”

In trying to explain education outcomes, it is useful to divide relevant factors into those affecting the demand by families for formal education for their children and those operating on the supply side. The weak performance of Aboriginal relative to non-Aboriginal students arises from both kinds of factors. An important distinction to make here is between the contribution of school and of a student’s family. Parents with higher education and income contribute more, on average, to their children’s education. Disproportionately, Aboriginal students come from low-income families with low formal education. Many Aboriginal parents harbour a mistrust of formal education as an instrument of assimilation and place limited importance on mastery of core subjects (reading, science and mathematics).

Aboriginal students are also more likely to reside in isolated communities. Despite higher per-student funding in rural than in urban schools, the education outcomes in small schools in isolated communities are, for all students, generally inferior to outcomes in urban communities. Negative peer effects play a role. In schools with large Aboriginal student cohorts, Aboriginal students tend to perform less well. Finally, discrimination may exist in the school system. For example, teachers and administrators may form low expectations of Aboriginal student potential.3

In explaining B.C.’s superior performance, above-average on-reserve incomes, employment rates and education levels among parents are all relevant. In addition however, many have insisted on institutional factors. In B.C., relative to most other regions of the country, encompassing First Nation education associations have a longer history of assuming some functions of school districts in provincial systems. B.C. also has more organized links between reserve and provincial schools.

There are about 500 reserve schools across Canada. Some of these schools have close links with adjacent schools in a provincial system. In all provinces, associations – some weak, some strong – provide secondary services for reserve schools. However, for most reserve schools, the reserve council makes the managerial decisions, with little coordination with other reserve schools or the provincial school system.

Dedicated teachers can achieve remarkable results in stand-alone schools, but the overall results are never likely to be satisfactory. Michael Mendelson has described the status quo as a “non-system” and compared it to the situation in the Prairies a century ago when rural municipalities each ran one- and two-room schools.4 In a broad discussion of reserve governance in Inroads, John Graham stated his pessimistic conclusion about individual band governance of major social programs: “In the rest of Canada and elsewhere in the Western world, local governments serving 600 or so people have responsibilities … No countries assign to such small governments responsibility for the ‘big three’ areas of education, health and social assistance.”5

In mid-20th century, rural municipalities, often reluctantly, yielded strategic direction of schools to provincial education ministries. A necessary condition for children growing up on reserves to realize decent education outcomes, Mendelson and Graham argue, is that individual First Nations agree to entrust many decisions over school policy (such as teacher certification) and secondary services (such as curriculum design) to professionally managed First Nation school authorities.

The reform initiative and Bill C-33

In 2011, Shawn Atleo of the AFN and Chuck Strahl, at the time federal Aboriginal Affairs Minister, agreed to a joint panel to evaluate reserve schools. The panel based much of its analysis on institutional factors:

In the early 1970s, following the dissolution of the residential school system, and the devolution of First Nation education to individual First Nations, virtually no thought was given to the necessary supporting structure for the delivery of First Nation education. There was no clear funding policy, no service provision and no legislation, standards or regulations to enshrine and protect the rights of a child to a quality education and to set the education governance and accountability framework.6

The panel discussed the case for statutory funding for reserve schools that would be comparable on a per-student basis to the funding provided by provinces for comparable provincial schools. Stating the case for comparable funding has proved much easier than identifying the size of the “funding gap” in any province. A recent attempt to analyze the gap concluded that present data do not allow for a convincing conclusion.7 The explanation for this agnosticism is incompatibility between federal and provincial accounting procedures and the difficulty of defining what provincial schools should serve as benchmark for comparison with reserve schools.

The panel also highlighted the role of several encompassing institutions that provide secondary services and enjoy some of the authority exercised by school districts within provincial education systems.8 The most elaborate of these is the First Nations Education Steering Committee (FNESC) and the associated First Nations School Association (FNSA) in B.C.

Many First Nation children living on-reserve are attending provincial schools, and many families move frequently between their reserve and an off-reserve community, or between provincial communities. At any point in time approximately 40 per cent of children living on-reserve are attending a nearby school within a provincial system. To the extent that institutional factors explain B.C.’s superior high school completion rate, it is not only First Nation institutions that matter. So too do policies of B.C.’s school system and the regional Aboriginal Affairs office. In summary, B.C.’s institutional advantage has four components:

There are well-established encompassing First Nation education organizations: Virtually all First Nations in B.C. belong to FNESC and FNSA. FNESC represents First Nations in negotiations with the provincial education ministry in Victoria and the federal Aboriginal Affairs department. FNSA provides secondary services to schools, assesses reserve school performance in reading, arithmetic and other metrics, and designs curriculum.

Since the 1990s, B.C.’s education ministry has provided incentives for provincial school districts to reduce the performance gap between Aboriginal and non-Aboriginal students: For two decades the B.C. education ministry has provided school districts with additional funds based on the number of Aboriginal students in district schools, and required the districts to prepare Aboriginal Education Enhancement Agreements in conjunction with local Aboriginal leaders having a stake in education. The intent is that districts use their incremental funds for Aboriginal education projects and that the Enhancement Agreements define proximate goals, such as targets for Aboriginal students in provincial core competency tests or in attendance rates.

The province gathers and publishes better Aboriginal student performance data: The B.C. education ministry has a tradition of publishing detailed Aboriginal student performance in provincial schools, disaggregated to the school level. B.C. is the only province that reports Aboriginal student results on core competency tests (in mathematics and reading) disaggregated by school. While it is not as comprehensive, FNSA publishes on-reserve student performance.

Relations with the regional Aboriginal Affairs office have been more productive than in most regions: Thanks to well-established encompassing First Nation education organizations and a provincial tradition of affirmative action, it has been easier in B.C. than in most provinces for the regional office to build working relationships with the provincial education ministry and to coordinate education policy with First Nations.

Bill C-33’s authors sought to create a legislative framework that would require First Nations across Canada to provide clearer lines of authority for professional management of reserve schools and enable creation of larger encompassing education associations like the ones in B.C. Simultaneously, the bill legislated the principle of comparable per-student funding. The key provisions of Bill C-33 can be summarized as follows:

Preamble: The preamble contains 11 “whereas” clauses that state the dual goals of the legislation as perceived by the AFN national office and AANDC. As illustration, one clause refers to the appropriate cultural dimension of First Nation education (“Whereas First Nations children attending schools on reserves must have access to education that is founded on First Nations history, culture and traditional values”). Another clause refers to a curriculum enabling students to acquire competence in core subjects and hence be mobile between school systems (“Whereas First Nations children attending schools on reserves must have access to elementary and secondary education that allows them to obtain a recognized high school diploma and to move between education systems without impediment”).

Creation of Joint Council of Education Professionals (ss. 10–19): Though the legislative powers of the minister of Aboriginal Affairs are rarely used, wide ministerial discretion exists. Bill C-33 reduces this discretion by creating the Joint Council, to be composed of an equal number of members appointed by the minister and by “any entity representing the interests of First Nations that is prescribed by regulation” (s. 12) – expected to be the AFN. The duties of the Joint Council are ill defined but open-ended. The expectation is that it would assume a progressively more important role in elaboration of reserve school policy.

Enabling First Nation councils to delegate powers to a First Nation Education Authority (s. 27): The bill enables First Nation councils to delegate their education powers to “a body corporate incorporated under federal or provincial legislation if the agreement meets the conditions set out in the regulations” (s. 27). This enables councils to create collectively a reserve equivalent of a school district in provincial systems. While instances are expected to be rare, this section enables a First Nation council, if it desires, to join a provincial school district.

Specifying minimum structure for schools run by a First Nation council: Bill C-33 requires that any council operating schools on a “stand-alone” basis meet certain statutory requirements:

The council must prepare the school’s annual budget and provide the minister and the Joint Council with a copy (s. 21).

The council must appoint individuals to three positions: director of education (s. 35) responsible for overall management of education programs; principal (s. 36) responsible for running a school, and school inspector (s. 37) to evaluate school programs.

The principal must, among other duties, construct a “success plan” stipulating proximate school goals that he or she deems appropriate (s. 27).

Principle of statutory funding (ss. 43–45): Payments to a reserve school must be such as to enable provision of services “of a quality reasonably comparable to that of similar services generally offered in a similarly sized public school that is regulated under provincial legislation and is located in an analogous region” (s. 43). Funding “must include an amount to support the study of a First Nation language or culture as part of an education program” (s. 43).

The response, the conflict and the future

Once the bill was tabled, the AFN published a detailed analysis that elaborated on the case for it.9 The AFN stressed the extent to which the legislation limited existing ministerial discretion and enhanced the AFN’s objectives with respect to the goals and funding of reserve schools. However, the AFN’s analysis did little to persuade the majority of chiefs who, from the beginning of the reform initiative in 2011, had been sceptical of any legislation requiring change to reserve school organization. These chiefs argued that the core remedy was to close the elusive “funding gap” via much-increased funding of reserve schools. In addition, many opposed Bill C-33 on grounds that the treaty right over K–12 education is absolute: any legislation that constrains the autonomy of First Nations in managing reserve schools is unacceptable. Opponents cited the provisions specifying minimum structure for schools run by a First Nation council as examples of such constraints.10

Yet others noted the many sections in the legislation referring to as yet unwritten regulations and the extent of remaining ministerial discretion. Given a history of mistrust, many chiefs interpreted all such qualifications as loopholes whereby Ottawa would symbolically enhance First Nation control while, in fact, maintaining control itself. The gap between the intent of Bill C-33’s advocates and interpretation of the bill by critics is stark. According to Manitoba Grand Chief Derek Nepinak, Bill C-33 is:

an attempt to create the illusion of First Nations control over education. At the same time it maintains – in the spirit of Canadian colonial lawmaking – an unfettered discretion accruing to the minister and granting him or her with sweeping power and control over a variety of educational matters … Indigenous peoples living in the successor state of Canada (with or without treaties), have rights of self-determination, recognized under international law and are blatantly denied in the current form of this bill.11

Perhaps not surprisingly, many of the most prominent critics of Bill C-33, including Nepinak, head First Nation reserves in the Prairies. These chiefs represent a disproportionate share of the most isolated reserves, whose members have few local off-reserve employment opportunities. In his assault on Bill C-33 Nepinak did not attempt to explain why high school completion among young First Nation adults in his province is so low or why completion in Atleo’s province is double that in Manitoba. It seems fair to conclude that, for many of the chiefs who opposed Bill C-33, discussing managerial and administrative changes likely to improve reserve school outcomes is not the point. What matters is affirmation of the treaty right to run reserve schools autonomously.

Put crudely, the opponents argue in the tradition of the Red Paper; the supporters are in the tradition of Hawthorn. Bill C-33 is the product of collaboration – at times strained – between an articulate, largely urban and well-educated First Nation leadership and senior government officials committed to institutional reform. Implicitly, the AFN under Atleo acknowledged the widespread weakness of reserve school management and the legitimacy of Bill C-33’s attempt to create a “space” on-reserve for leaders interested in education as opposed to other political concerns. Implicitly, the engaged government officials acknowledged the absence of professional knowledge on school management within AANDC. Ironically, the people with the best practical knowledge of running schools, those engaged in provincial school systems, have been largely absent from this debate.

Less than a month after the tabling of Bill C-33 in Parliament, the conflicts among First Nation leaders came to a head. A factor encouraging opposition to Atleo was the refusal by both NDP and Liberal caucuses to support Bill C-33 in second reading. This allowed Bill C-33’s opponents to characterize it as a partisan Conservative undertaking. Atleo chose to resign as National Chief while reiterating his support for Bill C-33: “The current proposal on education is the latest attempt and a sincere, constructive effort on the part of Prime Minister Stephen Harper to take a step forward.”12 In response to Atleo’s resignation, the government has withdrawn Bill C-33, at least until the chiefs select a new leader for the AFN.

At the time of writing (October 2014), Bill C-33 is in purgatory. Given time for passions to cool, the AFN may choose a new national chief who, like Atleo, is committed to fundamental education reform. With some amendments, a version of Bill C-33 may in due course be enacted.

Alternatively, both AANDC and AFN may abandon education reform. In which case, the best prediction for reserve schools over the coming decade is a continuation of the status quo. There will be pockets of on-reserve education excellence led by exceptional chiefs and councils. Coalitions of First Nation and provincial politicians will undertake tentative reform initiatives in some provinces. Overall, however, there will be far too many underperforming schools.

Continue reading “Fixing Aboriginal education”

Keith Banting and John Myles, eds.,
Inequality and the Fading of Redistributive Politics.
Vancouver: UBC Press, 2013.
480 pages.

Keith Banting and John Myles have assembled 17 articles on trends in inequality within Canada over the last three decades, 1980–2010, including substantial introductory and concluding articles written by themselves. This is a serious attempt to grapple with a serious problem. With apologies to authors whose articles I ignore, this review bears primarily on the articles by the editors and the one by David Green and James Townsend, who analyze explanations for wage polarization.

The editors start with two undeniable generalizations about income distribution in Canada over the three decades:

First, the distribution of market incomes grew more unequal. By one measure, the Gini coefficient of individuals’ market incomes, the increase in inequality from 1980 to 2010 was roughly 20 per cent. Taxes and transfers completely offset rising market inequality until the mid-1990s. Since then, post-tax post-transfer inequality has risen by roughly 10 per cent.

Second, post-1980 market income increases have been concentrated in the top quintile of income earners. Inflation-adjusted market incomes of those at or below the median essentially stagnated over the three decades.

Canada’s 
“neoliberal moment”

Why did the tax-transfer system become less effective over the second half of the three decades? The editors’ underlying explanation is ideological: neoliberal ideas symbolized by Reagan in the United States and Thatcher in Britain seeped into Canada. In the mid-1990s Canada experienced what they describe as a “neoliberal moment … Policy restructuring shrank programs that provided support to vulnerable Canadians, such as unemployment benefits and social assistance, and reduced the progressivity of the tax system.”

The editors admit qualifications and counterevidence: for example, trends in poverty rates, a subject obviously linked to discussions of income inequality. Measuring poverty raises thorny philosophical issues. Leaving them aside, the editors acknowledge that, by the two most widely used Canadian poverty measures, poverty either stayed constant or declined over the three decades.

The most frequently cited Canadian poverty statistic is the percentage falling below after-tax low income cutoff (LICO) thresholds. The thresholds adjust for family size, community size and inflation. The real value of what can be bought at the thresholds was last benchmarked in 1992. LICO is an absolute poverty measure: the real value of what can be purchased at threshold incomes remains constant over time. The LICO poverty rate rose in the early 1980s recession, fell in the subsequent boom, and peaked above 15 per cent in the early 1990s recession. Since the mid-1990s, the LICO poverty rate has fallen nearly in half. It rose slightly as a result of the post-2008 recession, but finished the decade at its lowest value since the mid-1970s.

The second poverty statistic measures the percentage of individuals with incomes below half the median income of all Canadians. The low income measure (LIM) is a relative measure: the thresholds rise and fall on the basis of what happens to the income of the typical Canadian with median income. LIM poverty rates fluctuated less than LICO rates, and finished the three decades at levels similar to those at the beginning.

Not surprisingly, reliance on social assistance is linked to the state of the economy. The share of Canadians receiving social assistance was about 5 per cent in the late 1970s, rose to 7 per cent in the early 1980s recession and remained constant until the early 1990s recession. In the wake of the early 1990s recession, reliance on social assistance peaked above 10 per cent. At that point most provinces abandoned policies of generous welfare access, which had been the tradition in Canada. Some provincial governments (e.g. Tories in Ontario) resorted to Sturm und Drang; others (e.g. NDP in British Columbia) relied on stealth so as not to alienate their core supporters. The lowering of post-1995 LICO poverty rates is most evident among female-headed single-parent families. From 1995 to 2010, their LICO poverty rate declined from over 50 per cent to about 20 per cent. They substituted higher market earnings for lost social assistance.

At 20 per cent, single-parent poverty is still over twice the national average, and the explanation for the decline is more complex than the previous paragraph implies. In the late 1990s Canada introduced the National Child Benefit System (NCBS), a modest negative income tax for low-income families with children. Most provinces lowered welfare benefits dollar for dollar with NCBS payments. Families received no benefit from the NCBS while on welfare, but the NCBS allowed families to exit welfare at lower earning levels. Having exited, they faced lower clawback rates on incremental earnings than when on welfare.

If we limit the discussion to social assistance, the amorphous group defined as neoliberals surely have a strong case. Before 1995, Canadian governments spent a lot on social assistance with little to show for it. Since 1995, they have designed programs to limit general use of welfare, to increase benefits for the disabled, and to provide better incentives for the poor to enter the labour market. And the LICO poverty rate has fallen to historic lows. How can this be described as a “fading of redistributive politics”? What has faded has been faith in the efficacy of generous welfare benefits combined with ease of access as means to address poverty.

Banting and Myles acknowledge some of this, but it is en passant. It does not prompt them – or all other authors in this volume – to challenge their commitment to the goal, dating back to the 1960s, that antipoverty policy should be anchored on generous unconditional cash transfers, and in the limit on a guaranteed annual income. Some of the other authors are much less careful than the editors, and simply refer to post-1995 social assistance policy as an obvious example of antistate libertarian ideology at the expense of the poor.

Where the editors are on solid ground is their critique of the extent of tax reduction undertaken since 2000. It has been excessive. But here too the story is complicated. As a reason for Canada undergoing a “neoliberal moment” in the 1990s, the fiscal irresponsibility of both orders of government over the previous two decades is as important as ideology, if not more important. Looking at the sum of the accounts of Ottawa and the ten provincial governments, not once over the previous two decades had these accounts been in balance. Instead, the two levels of government engaged in mutual recriminations. Throughout the 1980s, the provinces blamed Ottawa for arbitrarily cutting the federal contribution to shared-cost programs; Ottawa accused the provinces of violating the spirit of these programs by overspending on them. Neither order of government addressed the inefficiencies in its programs.

By the mid-1990s, Canada’s net debt exceeded 100 per cent of GDP; we were the third most indebted OECD country, behind Italy and Belgium. Something had to be done. Given the large gap between taxing effort in Canada and the United States (see figure 1), it was inevitable that the emphasis would be on expenditure reductions as opposed to tax increases.

22_Figure_1

Figures 1 and 2 illustrate Canada’s taxing effort and public spending as shares of GDP. They make no reference to the kind of spending – over a third of Ottawa’s spending in the mid-1990s was on public debt interest – or the progressivity of the tax system, but they enable the reader to grasp where Canada was placed relative to other OECD countries. In the early 1990s recession, Canadian spending (figure 2) was not far below the upper quartile among OECD countries. It subsequently declined and was close to the OECD median over the second half of the decade. Post-2000 it continued to drift down as a share of GDP and roughly coincided with the bottom quartile for the final five years (admittedly, both Canada’s spending and the bottom quartile rose following the 2009 recession). Canada’s taxing effort was above the OECD median during the first decade illustrated. It drifted below the median over the second decade, finishing close to the bottom quartile of taxing effort.

How to explain wage inequality
22_Figue_2

Among the best-argued chapters is the one by David Green and James Townsend on explanations for the increasing inequality of market earnings. Their foil is the 1994 OECD Jobs Study, a major report arguing that industrial countries were experiencing long-term technological change favouring those with skills at the expense of those without, and that this was the fundamental explanation for rising earnings inequality. The OECD’s recommended policy to counter the trend was massive investment in education and skills training, combined with flexible labour markets enabling employers to hire and fire with few administrative constraints. Canada is among the countries that took this advice seriously. One piece of evidence: in the 2012 PISA comparative assessment of student school performance, Canada is the OECD country with the highest proportion of adults with postsecondary training. More on education below.

Green and Townsend are sceptical of the OECD’s explanation. Over the three decades, the ratio of mean wages among women with university degrees relative to those with high school alone was essentially constant. Among men, the ratio rose until about 2000; subsequently, it fell somewhat. How, they ask, can this be squared with the thesis of a dynamic driven by technology? Defenders of the OECD thesis counter that the increasing supply of better educated workers in the labour force offset what would otherwise have been a sharp increase in the skills premium. But, argue Green and Townsend, the shift in skills composition of the labour force occurred primarily pre-2000; it was fairly constant in the 2000s. If the OECD was right, the skills premium should have continued increasing in the 2000s. It didn’t.

The OECD’s explanation of wage inequality may be flawed, but there is clearly a large skills premium. What explains it? Green and Townsend are sceptical not only of the OECD explanation but of several others. They cast doubt on the idea that NAFTA or the massive increase of China’s presence in international trade explains much. Their preferred explanation fits within the thesis of the volume: the problem is primarily political. The OECD thesis distorted public policy. It led to unwarranted relaxation of labour legislation and a consequent decline in unionization in the private sector. It led to policies inducing firms to invest in digital technology and underinvest in machinery and equipment complementary to the skills of the less educated.

I am not sure that Green and Townsend have identified the most important avenues whereby policy has exacerbated earnings inequality, but I agree with them that politics matter. Elsewhere in this issue, Tom Courchene makes a convincing case that conventional wisdom among economists in favour of a free-floating exchange rate has been severely damaging to the manufacturing sector, which provides many middle-class Canadians with near-median-income jobs.

Over the last two decades the exchange rate between the Canadian and U.S. dollars has been closely tied to the price of oil. The loonie is a petrocurrency. As oil prices rose post-2000, so did the loonie: from the low 60 cent range to parity by 2010. This induced major shutdowns of Canadian manufacturing plants and relocation to the United States. Furthermore, China’s impact on Canadian wages cannot be measured solely by reference to the magnitude of foreign imports in trade-exposed sectors. The Chinese demand for resources – oil and gas in particular – is part of the present Alberta-dominated federal government’s motivation for favouring oil and gas exports from western Canada, which in turn exacerbate the impact of an overvalued loonie on manufacturing jobs.

Immigrants, Aboriginals and social trust

The chapter by Keith Banting, Stuart Soroka and Edward Koning deals with multiculturalism and redistribution. They note the “surprisingly positive” survey evidence among Canadians toward immigration and the paucity of evidence that large-scale immigration has lowered Canadians’ faith in redistributive politics. They contrast Canadian attitudes with the depressing results of Robert Putnam with respect to American public opinion. In a major oft-cited study, Putnam found that ethnic diversity in U.S. communities led to an erosion of interpersonal trust among everyone. Both immigrant and old-stock Americans “hunker down” in their respective ethnic communities and lose faith in government social policy. Elsewhere in this issue I review the recent book on immigration by Paul Collier, who also refers to Putnam’s work. His emphasis is on the European experience, which in general has been much less optimistic than that in North America.

The key reason for Canadian exceptionalism is probably Canada’s strict requirements for immigration, by international standards, in terms of education and ability to speak either French or English. However, Canada has not entirely avoided the European and U.S. syndrome of ethnic ghettos dominated by poorly integrated descendants of ethnic minorities. The Caribbean-dominated Jane-Finch neighbourhood in the north end of Toronto cannot be described as high-trust. The growth of militant Islam, symbolized by women covering themselves in public, has created a backlash in Quebec. In 2013, inspired by French precedents, the Parti Québécois government proposed a Charter of Quebec Values, supported by a combination of secular cosmopolitan feminists and traditional Québécois de souche. The new Liberal government will also legislate in this area, although its measures are expected to be less sweeping than the PQ’s.

Banting and colleagues also include in their chapter a discussion of attitudes toward Aboriginals among a random sample of Canadians. Those who thought “most Aboriginals are on welfare” were much less likely to endorse the statement that “refusing welfare to single parents is unfair to their children” and more likely to support the alternative proposition that “giving welfare to single parents encourages irresponsible behaviour.” Their conclusion from survey analysis is that negative views of Aboriginal reliance on welfare has a “toxic effect” on attitudes toward the entire welfare state.

Clearly implied in this chapter is that those who supported any of the statements critical of Aboriginal use of welfare are probably guilty of racist attitudes. Some undoubtedly are racists, but some respondents probably had a more sophisticated view of social assistance and Aboriginal policy than those who composed the questionnaire. And some who gave responses favourable to generous access to welfare analysis may well have suppressed their critical thoughts and opted for the politically correct answer to avoid any stigma of racism. In sum, basing conclusions about the willingness of Canadians to maintain a generous welfare state on such questions is dubious.

A glaring omission

There is no chapter in this volume on the role of K–12 education as policy to reduce inequality. Symbolic is the first table (at p. 5), which compares trends in public “social expenditure” over the last half century among a sample of OECD countries. For reasons not explained, the data exclude education. Green and Townsend indirectly criticize public policy emphasis on postsecondary education because of its link to their foil, the OECD Jobs Strategy. Robin Boadway and Katherine Cuff briefly discuss the role of postsecondary education, but not primary or secondary. Rianne Mahon discusses the contrast between Quebec and Ontario with respect to early childhood education but does not analyze its impact on equality.

Here are a few basic statistics on the link between education, employment and earnings, according to the 2011 census. For those without high school certification only 34 per cent were employed, and median earnings (for those with at least some earnings) were only $16,000. For those with high school but no further education, the employment rate jumped by more than 25 percentage points and median earnings rose to $23,000. To achieve what Canadians consider middle-class incomes required some form of postsecondary training. For those with a trades certificate, college diploma or university degree, median earnings were $40,000.

The OECD’s Programme for International Student Assessment (PISA) has become the best-known exercise in making international comparisons of school systems. In each “round,” PISA assesses student performance at age 15 in three subjects: mathematics, science and reading. In the latest round, conducted in 2012, mathematics was the focus. Canadian schools slipped somewhat in rankings relative to 2009 but remained well above average. (Not discussed here are detailed PISA results by province. There are large differences among them.)

Educational outcomes vary according to the supply of education services and the demand by parents and their children for formal education. On the supply side, a fundamental distinction is between the services provided by schools on the one hand and by a student’s family on the other. Separating the contribution of schools from that of families (in terms of both supply and demand) is not easy. PISA makes a serious attempt to do so via construction of an index of social, economic and cultural status of students’ families. An intuitive appreciation of the PISA strategy is afforded by the social gradients illustrated in figure 3.

22_Figure_3

The figure illustrates social gradients for all students living in OECD countries and for those in Canada, in the United States and in five selected European countries. For each of these eight populations, students whose school performance has been assessed also provide information about their families. This permits construction of a national social-economic-cultural index of students’ families. The two end points in the figure for each gradient are the average index values among the bottom and top quarters of students ranked by this index with their corresponding average mathematics scores. The line connecting them is the social gradient. The gradient’s slope is a measure of the increase or decrease in expected mathematics score for a unit increase or decrease in students’ family status. (The increase in expected mathematics score arising from a one-point increase in the social-economic-cultural index appears in parentheses in the legend.) The “flatter” the gradient (the smaller the slope), the more successful is the school system in offsetting social disadvantage. By this measure, Canada has a relatively egalitarian school system.

The gradients furnish three measures of a country’s school system: (1) average performance among socially disadvantaged students, (2) average performance among socially advantaged students, and (3) a measure of the ability of the school system to overcome students’ disadvantage due to low social-economic-cultural family status.

Among the countries illustrated, Canada enjoys the highest top-quarter index value and second highest bottom-quarter index value. Its bottom-quarter mathematics score is in a virtual tie with Finland; its top-quarter score ranks third behind Germany and France. The slope of the Canadian gradient (32.7) is the “flattest” of those illustrated, and is well below the OECD average (39.3). At the other end of school system equality is France. It enjoys the second highest top-quarter mathematics score, but is tied with United States for lowest bottom-quarter score. The result is that France has the “steepest” gradient (58.1), nearly twice Canada’s. While French students from socially advantaged families perform well, the French system, like the American, is weak in offsetting social disadvantage. Disproportionately important among the bottom quarter are many second- and third-generation Muslim immigrants from Africa.

Finally, education policy should be central to Aboriginal policy. The youngest census cohort for which it is reasonable to expect high school completion is ages 20–24. Among those in this cohort who identified in the 2011 census as North American Indian or First Nation, only 60 per cent had completed high school. This compares with 90 per cent among non-Aboriginals. These statistics should lead us to explore what is going on within schools. Figure 4 displays results for reading, by grade, in a sample of reserve schools in British Columbia. The pattern is typical for Aboriginal children in schools across Canada. Among those children who attend preschool and kindergarten, roughly two thirds are reading “at grade” level. (Not all students attend preschool.) The share reading at grade level falls below half in early primary grades and drops to 20 per cent by grade 8. The at-grade share rises to 30 per cent by grade 12, as a result of large numbers of academically weak students dropping out.

While these results are hardly encouraging, B.C. is in fact faring dramatically better than the other provinces in terms of Aboriginal education – particularly with respect to those living on-reserve. The worst Aboriginal education outcomes exist in the prairie provinces. PISA does not record student ethnic identities, but the fact that Manitoba’s bottom-quarter mathematics scores are tied for lowest across provinces and that the slope of its gradient is second highest is probably closely related to the disproportionate presence of Aboriginals among Manitoba’s bottom-quarter students.

All of which implies that inequalities matter but understanding them is not easy. Banting and Myles deserve credit for making a determined effort.

Paul Collier begins this book with a précis of his family history. Prior to the First World War, his grandfather, Karl Hellenschmidt, migrated from an impoverished German village to Bradford, at the time a prosperous city in northern England. Come the war, a “gutter rag” newspaper labelled Hellenschmidt a traitor and a mob ransacked his shop. Hellenschmidt was interned; Paul’s grandmother sank into terminal depression. His father, age 12, left school to run the shop. A quarter century later, the threat of European war reemerged and Paul’s father decided to change his name and his identity and become English.

Given this prologue, you might expect Collier to have written a book denouncing “host country” nationalism and accompanying xenophobia towards immigrants. You would be wrong: the prologue is there to disarm critics tempted to dismiss Collier as a bigoted “little Englander.”

Collier’s opening gambit is a critique of conventional wisdom among Western elites. Too many favour open immigration and multicultural policies, and refuse to admit the potential costs of immigration and its distributional consequences among citizens of the host country. This political correctness has, he argues, blocked rational discussion of the pragmatic and ethical implications of large-scale immigration. Collier advocates fairly tight immigration restrictions, particularly on ethnic groups with cultures dramatically divergent from Western liberal norms, and active policies to integrate ethnic-minority diasporas into the cultural mainstream of the host country.

Collier is an economist, currently at the University of Oxford. However, he spent much of his career working in sub-Saharan Africa analyzing why sub-Saharan countries are mired in poverty. He belongs in a major school of academics who attribute escape from poverty into industrial prosperity primarily to institutional factors that, for random reasons, first coalesced in Renaissance Europe.

Niall Ferguson, prolific historian and public intellectual, is another prominent academic in the institutional school. Somewhat glibly, Ferguson has summarized institutional analysis through the image of “killer apps” – institutional arrangements first developed by Europeans but now being successfully downloaded by many countries in east and southeast Asia. These “apps” include Lockean ideas legitimizing private property, the common law (an institution to defend property rights from the executive arm of the state), respect for universal education and scientific inquiry, and an Aristotelean sense of a state strong enough to contain the excesses of class and religious conflict but not strong enough to control civil society.

Britain became the first European country to industrialize because of a set of fortuitous events. Queen Elizabeth I worked out a compromise between Catholics and Protestants, which spared England the religious-inspired civil wars that ravaged continental Europe in the 16th and 17th centuries. A freak storm wrecked the Spanish Armada in 1588. A century later, English parliamentarians successfully pulled off a constitutional coup with minimum violence. They obliged the Catholic King James II, who was intent on reestablishing a Catholic monarchy, to abdicate, and they enacted a bill of rights, the basis for a constitutional monarchy.

At the heart of the institutional argument is the role of social trust, between individuals and between organization leaders. In a society of high social trust individuals and organizations respect the rules of the game, not always but most of the time. In such societies complex long-term contracting between strangers in the world of commerce is by and large feasible, and the state can undertake ambitious spending with the confidence that civil servants will by and large perform their assigned tasks and citizens will by and large pay their taxes.

Institutional economics is implicit throughout Exodus. Europe and the European settler societies are prosperous primarily because of high trust and the “killer apps.” Understandably, would-be migrants from poor societies want access to high-trust societies where their skills can, even in menial work, generate a large premium over earnings in their country of origin. In sum, migrants unambiguously benefit from migration.

What about members of the host society?

There may be complementarities of immigrant skills with those of indigenous workers. There may also be net benefits in the sense that immigrants’ tax payments exceed the cost of the public services they consume – if immigration is limited to working-age adults with few dependents. These aggregate benefits, however, may be unevenly distributed. High-income members of the host society may obtain better services at lower cost than otherwise, while low-income host society workers experience stagnant wages. Ultimately, Collier concludes, the economic benefits to the host society are likely to be marginal.

The answer to the question must go beyond simple economic calculations. The central problem Collier emphasizes is that posed by Harvard political scientist Robert Putnam. Putnam is one of the leading academics to have advanced the thesis that trust is a kind of capital asset in any society, along with physical plant and equipment, public infrastructure and a well-educated work force – all of which are necessary for industrial prosperity.

Migration enters the story through the impact of ethnic diversity on social trust. In a controversial article to which Collier refers, Putnam concluded that, at least in the short run, higher ethnic diversity means lower intergroup trust:

In the short run … immigration and ethnic diversity tend to reduce social solidarity and social capital. New evidence from the US suggests that in ethnically diverse neighbourhoods residents of all races tend to “hunker down.”Trust (even of one’s own race) is lower, altruism and community cooperation rarer, friends fewer. In the long run, however, successful immigrant societies have overcome such fragmentation by creating new, cross-cutting forms of social solidarity and more encompassing identities.

Collier discusses a multitude of empirical studies on immigration from which he draws three fundamental conclusions:

Not surprisingly, the probability of immigrants seeking to leave their country of origin for a high-income host country depends on the average per capita income gap between the two. In the case of France and England, this means a large share of migrants are from ex-colonies – from the Maghreb and francophone west Africa for France, from South Asia and the Caribbean for England.

The probability of migration is higher if there exists, in the host country, a large diaspora into which the immigrant can readily fit.

The negative impact on social trust in the host society is higher if the immigrant diaspora is less integrated, in terms of speaking the host society lingua franca and achieving average host society education levels.

If Putnam is right – and Collier thinks he is – large-scale immigration from societies culturally far removed from that of the host society, living in a diaspora with few “cross-cutting forms of social solidarity,” leads to a significant overall lowering of social trust in the host society, which in turn endangers political compromise and encourages political extremism.

The examples that motivate Collier include the large diasporas of Pakistani and Bangladeshi origin in England. (The four Pakistani-origin young men who killed nearly 60 Londoners in a suicide mission in 2005 were, coincidentally, from Bradford.) Another is the Caribbean-origin diaspora, which erupted in violence in 2012, riots in which white Britons also took part. He discusses analogous events in France, such as mass incineration of automobiles in banlieues dominated by poorly educated, poorly integrated second- and third-generation Maghrébins.

The political upshot of relatively open immigration has been, in Europe, the growth of conservative populist parties hostile to immigration: the Front National in France, the United Kingdom Independence Party in Britain, and comparable parties in Holland, Sweden and elsewhere. At the time of writing, in April, polls indicate that a third of the seats in the European Parliament elections scheduled for May will be won by such parties.

So much for the economics and politics. What about the ethical implications of mass migration?

Liberal elites are typically drawn to a version of universal utilitarianism. In this view, that policy is best which maximizes the sum of benefits accruing to all concerned: members of the host society, migrants and those left behind in the country of origin. The elites acknowledge the need for quotas but they have no basis on which to assess how high they should be.

The immigrants clearly benefit from immigration. The benefits to members of the host society are ambiguous and often unevenly distributed. Those left behind in the country of origin may benefit from emigration via several routes, starting with remittances, which are an order of magnitude more important than official foreign aid. They also benefit to the extent that emigrants return to their country of origin, bringing with them enhanced human capital (due to education) or financial savings accumulated while working in a host country. However, if the state of governance is very low, emigration of the most capable may well be at a level that serves to entrench dysfunction. Collier cites Haiti: most decently educated Haitians are living in New York and Montreal. Were they living in Port-au-Prince, they would be less prosperous but their political weight would improve prospects for decent governance.

Collier’s best-known book, The Bottom Billion, is about those living in countries – primarily in sub-Saharan Africa and central and south Asia – whose societies have not adopted the killer apps. These societies are riven by tribal conflicts, religious wars and complex interconnected networks of extreme political corruption and instability. The elites in control of these states have been unable (or unwilling) to organize decent schools and primary health care for the majority. For those with the misfortune to live in one of these countries who have the means, emigration – whether it be legal or illegal – is an immensely attractive option. Extended families may choose a young family member to send abroad, with the expectation that he will settle in a high-income country, enjoy the massive increase in earnings emigration enables and remit a sizeable fraction to his family still in the bottom-billion country.

Canada is a particularly privileged country when it comes to immigration. Unlike the United States it shares no border with a low-income country; unlike western Europe it is an ocean removed from countries of the bottom billion. Canada has been able to impose strict immigration requirements in terms of education and knowledge of one of our two official languages. On the other hand, Spain, Italy and Australia have in common the fact that they are a relatively short boat trip from countries of the bottom billion. Free movement within Europe means that northern European countries often become the ultimate destination for immigrants from the African continent.

Collier admits to many moral quandaries. How generous should the offer of asylum be to refugees from the most dysfunctional of countries – Somalia or Syria for example? Is Australia legitimate in refusing access to the mainland for illegal immigrants captured at sea?

Collier does not offer precise answers to any of these quandaries. The ultimate value of Exodus is to free debate from both the guilt of host country liberal elites and elites’ blinkered perspective as beneficiaries of the high-quality, low-cost services immigrants provide.

How can good intentions be translated into effective antipoverty policies?

For the poor shall never cease out of the land: therefore I command thee, saying, Thou shalt open thine hand wide unto thy brother, to thy poor, and to thy needy, in thy land.
— Deuteronomy 15:11 (King James Version)

There is fatalism implicit in the above verse, combined with an instruction to the non-poor to be generous. All the contributors to this section are prepared to be generous or, more precisely, to have the state be generous. But that is only the beginning of their deliberations.

8_stockholm_sidewalk_flickr_BMiz

John Myles begins with an illustration that, in Canada as elsewhere, income distribution has become more polarized over the last four decades. The overwhelming majority of per capita income increases since the mid-1970s have accrued to those above the 80th percentile of the income distribution. If we measure the poverty threshold by the (constant dollar) value of the 10th percentile, the poverty rate remained static from the mid-1970s to mid-2000s. There has been at best a very modest improvement since then, as suggested by the decline in the after-tax Low Income Cut-Off rate from 2005 to 2011. The policy conclusion he draws is the necessity of maintaining a sufficiently ambitious taxation regime to provide adequate financial resources for a range of antipoverty measures – from high-quality early childhood programming targeting the poor to straightforward cash transfers.

Kevin Milligan approves of Ottawa and the provinces having introduced, over the last two decades, a series of income transfers targeted to poor families with children. His contribution is a plea to put some order into them. Using British Columbia as an example, he notes that “the system has become extraordinarily complicated … a family in British Columbia in 2012 could potentially be eligible for ten separate tax benefits for families with children: six federal and four provincial … Each of these credits on its own has a justification, and many, taken one at a time, are well designed to achieve the intended purpose. However, taken as a whole, it is hard to envision a more complicated web of programs.”

He calls for placing these programs into two “bins” – the first targeting those in greatest need and the second targeting, in part, those above a poverty threshold but nonetheless “near poor.” Milligan envisions an element of universality in second-bin programs: they would be clawed back (over the half-median to median range) but not entirely; even at high income levels, a modest transfer should survive. His goal is twofold: an increase in transparency for recipients and program designers, and a redesign of second-bin transfers to bring the aggregate “clawback rate” on these transfers below some intergovernmentally agreed maximum.

Rhys Kesselman takes on “guaranteed income,” recently advocated by Senator Hugh Segal. Kesselman identifies three versions: (1) a “fill-the-gap” approach that provides each poor household with benefits equal to its shortfall from a poverty line; (2) a “guaranteed income” that pays an amount equal to the poverty line for a household with zero income and claws back the benefit with higher incomes; and (3) a “basic income” that pays all households an assured amount irrespective of their incomes.

Each faces obstacles that advocates rarely discuss. A fill-the-gap approach entails a 100 per cent clawback on all earnings below the poverty line, a very high disincentive to undertaking any paid work over the relevant income range. The guaranteed income must either be very modest or face the problem that above the threshold at which personal income tax becomes payable (about $15,000 annual income in Canada), the sum of income tax rates, payroll tax rates and clawback rates on the guaranteed income becomes very high. In the third version, even if the amount of the basic income is modest, say $10,000 per capita, the result would be to double the federal budget. Financing it would require prohibitively high marginal tax rates.

In view of these findings, Kesselman recommends against further expansion of generalized cash transfers. Instead, his analysis supports targeted increases in cash transfers (such as for people with major disabilities) and expansion of diverse in-kind benefits that will assist vulnerable children and youth in escaping the cycle of poverty without invoking punitively high effective marginal tax rates.

The final contributor is Henry Milner. His foil is Richard Wilkinson and Kate Pickett’s The Spirit Level, a bestseller in the genre of recent policy books calling for greater attention to income equality and reductions in poverty. The authors catalogue a long list of social outcomes – from life expectancy to obesity rates – that are better in countries with more income equality, worse in countries with more income inequality. The positive correlations with equality are invariably much weaker, Milner notes, if the Nordic countries are excluded from the calculations. That should lead the authors to go beyond the correlations and assess what it is about the Scandinavian welfare state that produces these favourable outcomes. Milner stresses the importance of “nonmaterial redistribution,” in particular programs that boost civic literacy.

In their contributions to this section, both Gregory Marchildon and Stefan Ackerby insist on the value of universal single-payer health insurance. Also, they are sanguine that the politicians and administrators responsible for managing Canadian and Swedish health systems will, over the coming years, make reasonably wise cost-benefit decisions for the system and that taxpayers will agree to pay the requisite taxes.

In terms of equity and efficiency, the case for a well managed single-payer health insurance system is strong. It overcomes a variety of market failures associated with private health insurance, and assures equitable access to a crucial service. But – and this is a major qualification – success ultimately rests on the quality of the managerial and political decisions undertaken. There are powerful pressures on government to avoid cost-effective decisions. We are less confident than Marchildon and Ackerby that good decisions will prevail. Hopefully they are right and we are wrong.

Trends in health care spending

In the context of population aging, simply extrapolating the status quo into the future will result in substantial increases in health care spending. In this article we project the magnitude of these shifts in spending trends, and look briefly at some of the politically controversial reforms that will probably be necessary to “save medicare.”

Canada is a relatively young country; it has a smaller over-64 population share than all but two other G8 countries. However, it is aging, and doing so at an accelerating rate (see figure 1). While the over-64 share increased by only three percentage points between 1990 and 2010, on the basis of our projection (details discussed below) it will rise another nine points by 2030. A second demographic trend will also have adverse fiscal implications: the population share in the active working age years (18–64) is shrinking. For this cohort, which pays the overwhelming majority of taxes, we project an eight-point decline in population share between 2010 and 2030.

fig1-rich-bus

In Canada, decisions governing public health spending are primarily made by the ten provincial governments – subject to the loose constraints imposed by the Canada Health Act and potentially by the courts. The federal government is the equivalent of a small province because it finances the health care of residents in the northern territories, on-reserve registered Indians and to some extent registered Indians living off-reserve. Ottawa finances a quarter of provincial health care spending through equalization and the Canada Health Transfer, while provinces finance three quarters through own-source taxation.1

The history of public health care budgeting over the last four decades can be divided into three periods (figure 2). The first, from introduction of provincial single-payer systems to the early 1990s, was characterized by fiscal drift. During this period neither Ottawa nor the provinces paid sufficient attention to fiscal discipline in the administration of their respective social programs. Politicians indulged in bouts of mutual recrimination. The provinces protested that Ottawa erected national standards but unilaterally restricted its share of costs as the federal debt worsened. Ottawa replied that the provinces were violating the spirit of cost-sharing agreements by irresponsibly expanding provincial social programs that could be cost-shared with Ottawa.

fig2-rich-bus

By the early 1990s, Canada had become one of the most seriously indebted OECD countries. There followed a half-decade of fiscal crisis. While public opinion was deeply divided over specific decisions, a majority favoured fiscal restraint. Federal and provincial governments that undertook this exercise were rewarded with subsequent reelection.

In a recent interview, Lucien Bouchard, premier of Quebec in the second half of the 1990s, was asked to name the political accomplishment of which he was proudest. His reply: “As premier of Quebec, my greatest accomplishment was elimination of the provincial deficit. It was incredibly difficult … We were approaching the abyss, with Quebec debt about to be relegated to junk bond status and the province paying ominously high interest rates.” Another question: What was your greatest error? Bouchard: “I often think of the program to retire nurses.”2

Bouchard’s replies nicely illustrate two points. Having underestimated the importance of fiscal discipline prior to the 1990s, provincial politicians discovered that preserving a single-payer health insurance system required “incredibly difficult” political decisions. Some of these decisions were eminently justifiable in terms of cost-effectiveness. Senior politicians and health administrators had long understood the rationale for closing many hospitals that were too small to provide sophisticated services or were located in communities with declining population. The hospitals had remained open as a result of local lobbying. The second point is that many decisions made in haste proved not to be cost-effective. Quebec was not alone in offering inducements to nurses to retire early, and subsequently regretting the loss of skilled health workers.

Among OECD countries, Canada stands out for the success of its fiscal rehabilitation in the 1990s. However, following the half-decade of fiscal crisis, Canadian provinces entered the third period, characterized by a return to fiscal drift. Perhaps the decline in spending increases in 2010 and 2011 implies a new attention to fiscal discipline, but it is too soon to know.

Others have undertaken similar projection exercises to ours.3 What we add to the projections of others is sensitivity analysis on “service intensity,” a variable that should become an important parameter in public discussion of health budgeting. In what follows, we disentangle the impact of changes in service intensity from the impact of an aging population on increases in the ratio of public health expenditure to GDP:

  • Shift in age distribution of the population. We project the age distribution of the Canadian population under a set of conventional assumptions with respect to fertility, life expectancy and interprovincial and international immigration (see Detailed projection assumptions box for more detail). Aging of the population generates two effects, both serving to increase public health spending as a share of GDP. First, there is an expenditure effect arising from the larger population share of high-needs elderly patients. Second, there is a GDP effect because aging of the population reduces the share of the population in the active labour force cohort (ages 18–64). We assume real GDP per person in this cohort grows at a constant rate.
  • Service intensity. A portion of change in per capita health care spending can be explained by population aging, but only a portion. The remainder, the change in per capita health care spending that would take place if the age distribution remained the same, we refer to as a change in service intensity. If per capita spending in each age cohort remains constant, then any change in per capita health spending reflects change in the population distribution, not in service intensity. Prior to the new millennium, population aging was of minor importance; hence changes in per capita spending were essentially due to changes in service intensity. Service intensity may rise for many reasons: introduction of new medical technologies, increase in compensation for health care providers at a rate above the assumed inflation rate, increase in ratio of health care workers per capita, expansion of the scope of health insurance and so on. We allow this parameter to vary.
Projection results

Figure 3 illustrates projected provincial health spending as a share of GDP, under the assumption that the average per capita change in real service intensity for the years 1998–2009 (2.3 per cent) persists to 2050. Provincial health spending rises from 7.7 per cent of GDP in 2012 to 21.8 per cent. If, hypothetically, the share of all age cohorts remained unchanged relative to the base year 2012 distribution, the increase would be from 7.7 per cent to only 13.0 per cent.

fig3-rich-bus

Sidebar: Detailed projection assumptions

Service intensity

Annual real rate of increase, 1998–2009: 2.26%

Health service inflation, average annual
1997–2011 change in current government expenditure implicit price index:       2.59%

Population projection

Total fertility rate:    1.5 children per woman

Life expectancy progressively
rises to reach by 2050:

for women:                                    87.5 years

for men:                                          82.5 years

Immigration: number and age-sex distribution relative to 1996–2011 average:  unchanged

Economic growth

Annual real increase in productivity
per capita among working-age cohort: 1.37%

It is highly unlikely that provincial governments over the next four decades will extrapolate recent rates of service intensity increase. If provinces reduce the rate by three quarters (to an annual increase of 0.6 per cent in real terms), provincial spending in the absence of population aging would decline. However, even under this severe constraint on rate of growth of service intensity, an aging distribution induces rising provincial spending relative to GDP: from 7.7 per cent of 2012 GDP to slightly under 10 per cent of 2030 GDP and slightly over 11 per cent of 2050 GDP.

From now to 2030 the demographic projections are near-certainties. The key parameter that politicians and officials must assess is service intensity: will politicians be able to reduce its rate of growth dramatically, and do so without the backdrop of fiscal crisis that faced Canada in the early 1990s? Maybe yes, maybe no.

From a peak in mid-1990s to 2012, Canada reduced its taxing effort by nearly seven percentage points of GDP.4 As a result, Canada fell from the middle of the second quartile among OECD member states, ranked by taxing effort, to near the bottom quartile. Over the last two decades, U.S. taxing effort remained within a much narrower range. Accordingly, Canada approximately halved the gap in taxing effort between the two countries. Given these trends, there may be a political willingness among provincial electorates to accommodate – somewhat – higher public health care spending by increasing their taxing effort.

Are Canadians willing to increase taxes? The World Values Survey affords evidence to the effect that Canadians – and residents of other majority Anglo-Saxon countries – are among the more adamant of those in OECD member states in not wanting government to “do more” than at present.5 In its 2005–08 round of the survey, respondents were asked to indicate the extent of their agreement or disagreement with the following propositions: “people should take more responsibility to provide for themselves” and “the government should take more responsibility to ensure that everyone is provided for.” Respondents could express complete agreement with the statement that people should take more responsibility to provide for themselves (scored at 10), compete agreement with the contrary position (scored at 1), or degrees of agreement with each by choosing a number between 1 and 10.

Among 17 OECD member states, average national scores ranged from 3.5 to 6.4 and were strongly correlated with average taxing effort in these countries over the decade 1999–2008. As would be expected, scores shifted toward “people taking more responsibility” at higher rates of taxing effort and toward the opposite proposition at lower rates of taxing effort. The Anglo-Saxon countries (United States, Britain, Australia, New Zealand, Canada) and Switzerland were outliers. At any given taxing effort, residents of these countries were more inclined to conclude that people should be taking more personal responsibility.

Arguably, the direction of causation should be inverted in the medium term: public opinion imposes a floor and ceiling on the ability of democratically elected governments either to tax and spend or to not tax and not spend. Canada’s average response is 6.0 on the ten-point scale. On the basis of a simple regression across the 17 countries, this response is 1.3 points higher than expected given its taxing effort – presumably because Canada belongs to the Anglo-Saxon subset. A three-percentage-point increase in taxing effort would increase Canada’s average score to the median among OECD countries and increase its hypothetical score in a future survey from its present value to 6.2, placing it close to the apparent ceiling of public tolerance for government “taking more responsibility.”6

Getting better value for money

Our first recommendation is modest: political and administrative elites should discuss aggregate public health spending in terms of an appropriate cap to place on growth of service intensity (as we have defined it) and be prepared to define budgets in terms of such a cap. There is no unambiguously optimal value for health care spending as share of GDP. Debating the allocation of public funds among competing uses lies at the heart of politics in any high-income society in which a universal health insurance system is inevitably the most important single spending envelope.

If we are looking for “good but unlikely to be adopted any time soon” reforms to contain health care costs, it is worth examining what other high-income countries are doing. Comparing Canada with Scandinavian countries or the United Kingdom is more meaningful than comparing it with the United States. Hence the value of Ackerby’s article. Given the importance of the British National Health Service (NHS) to the history of medicare in Canada and given that Canada and the U.K. are both reasonably populous culturally heterogeneous countries, the U.K. is a good initial comparitor.

The U.K. achieves broadly similar population health outcomes to Canada while spending considerably less as a share of GDP (11.4 per cent in Canada, 9.8 per cent in the U.K. in 2011). In terms of life expectancy at birth and containing tobacco addiction, Canada performs slightly better than the U.K.; in terms of infant mortality and potential years of life lost among those under age 70, Canada fares slightly worse. The U.K. and Canada maintain similar ratios of core professional personnel – doctors and nurses – relative to population.

The Canadian system is decentralized inasmuch as each province enjoys great autonomy in program design. At its birth in 1948, the National Health Service was run out of Whitehall as a hierarchical organization not unlike the army. Over the last quarter century U.K. governments, both Labour and Conservative, have decentralized the NHS by creating multiple “trusts,” defined in terms of region and health function. These are led by boards with broad discretion over major financial decisions pertaining to hospitals and remuneration of doctors and other NHS employees. These institutional reforms have been far more extensive – and far more controversial – than any undertaken by their Canadian counterparts.

Several institutional features of the NHS should be of interest to Canadian governments contemplating better value for money:
  • Capitation as the dominant means of compensating primary care providers. Whereas a Canadian general practitioner is typically paid via fee-for-service, a GP in the U.K. receives a negotiated amount per patient on his or her roster, the amount varying by age, gender and other patient characteristics. Neither mode of compensation should be evaluated as a means to reduce GP incomes, and both generate certain perverse incentives among care providers. Among self-employed GPs, those in the U.K. realize an average income slightly higher, relative to the national average wage, than do their Canadian counterparts – 3.6 versus 3.1. An underappreciated virtue of capitation is the relative ease of introducing new health professions into delivery of primary health care. As Åke Blomqvist and Colin Busby note, “the bulk of activity in the health system has shifted away from acute care to the monitoring and treatment of chronic illnesses.”7 Clinical pharmacists and nurse practitioners can play a valuable role in cost-effective delivery of primary care. In the Canadian context, their employment in this context has been limited, in large part because of the difficulty of designing a suitable mechanism for their remuneration within a fee-for-service environment.
  • Salary as the primary means of compensating specialist doctors. In the U.K. most specialists are employees of hospitals, their salaries negotiated by the relevant hospital trust. Hospital managers are obliged to include the cost of specialists among the costs of other necessary inputs in the course of budgeting. The result has been U.K. specialist incomes similar (relative to the respective average national wage) to most other OECD countries. Not so in Canada. In Canada, nearly all specialists are self-employed as are GPs. Canadian specialists have negotiated relative incomes much higher than salaried U.K. specialists, in part because the cost of specialists is not internal to hospital budgeting.8
  • Extensive use of internal markets. Internal markets require that public agencies (trusts in the U.K. context) purchase services from other public agencies. Not without controversy, U.K. – and Scandinavian – governments have made extensive use of this principle. For example, primary care trusts pay a fraction of deemed hospital costs to the relevant hospital trust for patients hospitalized by the GPs working under the trust. The intent here is to provide an incentive to constrain GPs’ resort to hospitalization.

In conclusion, there is no guarantee that Canadians will elect governments, either in Ottawa or in the provinces, willing to experiment with institutional reform of public health administration on the scale that has taken place in the U.K. However, if we do not address the fiscal implications of an aging population in an orderly manner, the result will probably be a replay, at some point over the next decade, of a disorderly imposition of spending caps analogous to those imposed in the 1990s.

 

Continue reading “Saving medicare for the next generation”

There is a parallel between the student protests in 2012 leading to cancellation of Quebec’s tuition fee increases and the referendum a year earlier that put a stop to sales tax reform in British Columbia. No one likes paying higher taxes or fees. But, viewed objectively, former Quebec Premier Jean Charest had a good case – as did former B.C. Premier Gordon Campbell.1

Charest defended his proposed university tuition fee increases in terms of both efficiency and equity. The efficiency case: Quebec imposes high tax rates, has a large public debt and is running deficits that, in the medium term, are untenable. Other provinces have demonstrated that higher student fees do not discourage student enrolment (Quebec enrolment is below the Canadian average despite very low fees). The equity case: Students are overwhelmingly from families with above-average incomes, and their degrees will enable them in turn to earn above-average incomes. Hence, for reasons of both efficiency and equity students should bear a larger share of the university costs they generate.

Rather than rebut Charest’s case, the students successfully changed the debate into “questions of principle.” Can a government, thanks to its commanding a majority in a legislature, legitimately legislate whatever level of taxes – or fees – it dictates? If a significant number of people object strongly to a tax or fee, should a government be required to seek additional democratic legitimacy, say by submitting the proposal to a referendum? Students answered no to the first question and yes to the second. I disagree. My answers are yes to the first question and no to the second.

The same questions can be asked in relation to B.C.’s debate over its harmonized sales tax, in which ex-Premier Bill Vander Zalm led a successful referendum campaign that culminated in the government rescinding the HST. For the first time, Canadians decided a major tax policy in a referendum, as opposed to in a general election in which voters weigh a government’s tax decisions against other considerations. While this was the first tax referendum in Canadian history, it may not be the last.

At first sight, Quebec student leaders and Vander Zalm do not have much in common. The student leaders take inspiration from the Occupy movement and French socialist traditions of tuition-free universities; Vander Zalm is a populist in the American Tea Party tradition. There are differences between the campaigns. The students generated sufficient civil disobedience to precipitate an early general election, and the winning party, the Parti Québécois, rescinded the fee increase. While a large minority supported the students, opinion polls suggested the majority did not. B.C. has referendum legislation on the books, and Vander Zalm’s campaign successfully exploited it. What the two events have in common is that both successfully challenged the legitimacy of a major revenue-raising decision enacted by a duly elected government.

For those east of the Rockies, the B.C. HST referendum is probably, at best, a vaguely remembered incident (just as Quebec’s tumultuous 2012 student protests are west of the Rockies). I start with a chronology of events, written with at least a semblance of neutrality. Following that, I put forward two conclusions. The first is obvious: there is little understanding among British Columbians – and probably Canadians in general – of the desirability of value-added taxation as the basis for consumption taxes. Second, this incident provides reason to fear the loss of legitimacy of parliamentary supremacy in matters of taxation.

A chronology

In the spring of 2009, British Columbians voted in a provincial general election. Tax policy was a major issue. In 2008, the governing Liberals had introduced a carbon tax with scheduled rate increases in future years. It was the first significant venture in this direction by any North American jurisdiction. In one of its less principled decisions, the NDP, official opposition in Victoria, promised that if elected it would repeal the tax. The Liberals won.

With the election over, Ottawa offered an inducement of $1.6 billion to B.C. (a similar incentive had been offered to Ontario) to transform its provincial sales tax (PST) into a broad-based value-added tax, the HST, that Ottawa would administer jointly with the federal goods and services tax (GST). From the opening scene in the summer of 2009, when then-Premier Campbell and then-Finance Minister Colin Hansen announced its conception, to the summer of 2011, when the curtain fell on its corpse, the HST consumed much of the political energy of British Columbians.

In the wake of a general election in which the governing Liberals had dismissed casual questions about sales tax reform, and with no public consultation, the B.C. cabinet accepted the federal offer. As in most provinces, the recession had induced a budget deficit and the prospect of a $1.6 billion windfall had obvious appeal. In retrospect, agreeing to the federal offer before conducting a major public engagement on the case for broadly based value-added taxation was a fatal mistake. However, as Premier, Campbell viewed his role as that of a senior executive pursuing strategic opportunities and initiatives, not as a mediator leading from behind. The B.C. HST came into effect in July 2010.

Political opposition to the HST quickly emerged, led by Vander Zalm but with extensive NDP support. The NDP made an unsubstantiated case that the impact of the HST would be regressive, but they did not propose low-income tax credits more generous than the ones the Liberals were proposing. The basis of their engagement with Vander Zalm was that the enemy of my enemy is my friend. B.C. shares with other western provinces and western American states a tradition of direct democracy enabling referendums on legislation and petitions to recall elected representatives. The “Fight HST” coalition collected enough signatures to oblige the government, under existing legislation, either to refer the HST to the legislature for review or to conduct a referendum. In September 2010, the government chose to conduct a binding referendum on repeal of the HST and return to the PST-GST.

Other interest groups entered the fray. Larger businesses formed the Smart Tax Alliance and undertook a well-funded pro-HST campaign. The impact of their campaign was probably counterproductive. It fed populist mistrust: if big business favoured the HST, the tax must be bad for the average family. Representing small business, the Canadian Federation of Independent Business (CFIB) hovered on the sidelines, unable to decide whether to intervene for or against the reform. The HST lowered tax compliance costs for federation members, a longstanding CFIB demand. On the other hand, the HST broadened the tax base to most services including restaurant meals, and restaurant owners adamantly insisted on preserving their historical sales tax exemption. The left-leaning Canadian Centre for Policy Alternatives articulated better than most the case for value added as the basis for sales taxation, but criticized the government for insufficiently offsetting regressive implications for low-income cohorts.

Academic and professional economists within the province assumed the role of chorus in classical Greek theatre. They argued that sales taxes should be levied on value added and on both goods and services, and that the PST was an inefficient accumulation of ad hoc exemptions and excessively taxed goods and ignored the evolution of the economy toward services.2 As in Greek drama, the chorus offered sage advice, but passions were high and the impact of economic lectures was negligible.

The political opposition maintained – without evidence – that the government had deceived the electorate during the 2009 election by concealing its intention to impose the HST. In November 2010, the chief protagonist in the drama, Premier Campbell, resigned. At this point, the government finally appreciated the furies it had unleashed. Among its initial responses was the commissioning of a provincewide survey of public attitudes toward the HST. Superficially, the debate was over the pros and cons of sales tax reform; more fundamentally, the debate had become an extension of the 2009 provincial campaign. The results of the survey are shown in table 1; the following points are worth highlighting:

  • At the time of Campbell’s resignation, a very large majority (74 per cent of respondents – table 1, statement 1) objected to his governing style, as exemplified by the HST decision.
  • A very large majority (70 per cent – statement 2) also agreed with the small government antitax ideology effectively promoted by Vander Zalm.
  • A similarly large majority (68 per cent – statement 3) accepted the argument, made most forcefully by spokespeople for the NDP, that the HST worsened the lot of low-income families.
  • A majority (56 per cent – statement 4) believed that the HST favoured business over consumers and thereby rendered income distribution more unequal.
  • Only a minority believed the government’s case that redesigning the PST would make it a “better tax for the economy” (37 per cent – statement 5), that the HST would improve the productivity of the provincial economy (34 per cent – statement 6), or that reverting to the GST and PST would hinder British Columbia’s ability to compete (32 per cent – statement 7).
  • A bare majority (50 per cent – statement 8) accepted the argument that the HST reform reduced compliance costs for firms.

From implementation of the HST in July 2010 to Campbell’s resignation four months later, opposition to the HST remained above 75 per cent (see figure 1). By late December, opposition fell to roughly 60 per cent, the level at which it remained until early May 2011.

Having persuaded Campbell to abandon the fight, HST opponents shifted their emphasis: the HST was a surreptitious tax increase with regressive incidence. It allegedly worsened overall income distribution by lowering the sales tax levied on major exporting firms.

In an attempt to inject credible neutral information into the debate, the government struck an independent panel (I served as a panel member).3 The panel’s report was released in early May 2011.

The panel confirmed opponents’ claims that the HST was not only a tax reform but also a tax increase. In its first year, the HST, net of offsets, collected nearly 10 per cent more revenue than would have been collected under the PST. Prior to implementation, the 2010 budget had claimed that, with allowance for personal income tax offsets, transition to the HST “is expected to be roughly fiscally neutral.” In a separate passage, the budget had allowed that “in future years, harmonization is expected to result in increased revenues … because the HST is a more stable and robust revenue source than the PST.”

On the other hand, the panel refuted the claim that the tax reform was regressive. Allowing for personal income tax offsets, family cohorts with income under $10,000 were slightly ahead; cohorts in the $10,000–$20,000 interval were unaffected; and cohorts at higher income levels paid more, with the percentage increase rising with income. Under the PST “pass through” assumptions incorporated in the panel’s modelling, the HST had indeed generated a shift in tax incidence from business to domestic consumers, but given that business largely passed through any taxes paid under the PST, the shift was modest. Finally, the panel predicted that the HST would lead to higher investment and a modest increase in overall economic productivity in the coming decade.

Following release of the panel’s report, the provincial cabinet conducted a series of electronic town hall meetings across the province to hear opinions and publicize the case for the HST. In response to its opponents, the government promised in late May 2011 to lower the provincial portion of the HST in stages from 7 per cent to 5 per cent, and to offset lost revenue by an increase in the provincial corporate income tax rate.4

These belated initiatives lowered opposition to the HST by a further 11 points between March and late May 2011. In a poll conducted in late May, HST supporters and opponents were virtually tied (see figure 1). But saving the HST was not a high priority for the new Premier, Christy Clark, and HST opponents rallied. A poll in early June showed a five-point rise in opposition to 54 per cent among decided voters. Referendum voting took place, by mail-in ballot, from late June to early August. The referendum result was identical to the result in the early June poll: 54.7 per cent in favour of repealing the HST, 45.3 per cent against.

The limited legitimacy of broadly based value-added taxation

In governments headed by left-of-centre and right-of-centre parties, government finance officials across Canada and Europe overwhelmingly agree that value added (the difference in value of goods and services sold and inputs purchased by a firm) is the appropriate basis for levying consumption taxes, and that consumption taxes should be a major source of government tax revenue. Most British Columbians – and probably most Canadians – disagree.

Not only is value added the appropriate basis; in principle, all firms should be liable to value-added taxation, whether they produce goods or services. Were the restaurant lobby to argue, for example, that all workers in the sector should be exempt from personal income tax and restaurant owners should be exempt from corporate income tax, public opposition would be intense. On the other hand, probably most British Columbians consider it defensible to exempt value added in the restaurant sector from sales taxes.

Income and consumption are the two largest tax bases from which Canadian provincial and federal governments generate revenue. Whatever the disagreements over details of personal and corporate income tax, the Canadian public accepts the legitimacy of governments using personal and corporate income as a base from which to raise general revenue. In provinces west of the Ottawa River, and in the United States, no comparable support exists for using value added across goods and services as the basis for levying consumption taxes. Two decades after introduction of the GST, widespread opposition toward the federal government persists for its reform of sales tax on the basis of value added. Such opposition is even stronger at the provincial level, and not only in British Columbia. Even though the Ontario Liberal government secured reelection in the fall of 2011, most observers cited the introduction of the Ontario HST as a reason for reduced Liberal support.5

This continuing opposition to broad-based value-added taxes offers a powerful temptation to political parties and interest groups to oppose sales tax reform. Small-tax conservatives oppose reform on the general principle that overall taxing effort should be lower. Left-wing critics oppose value-added taxation because, without targeted tax offsets, it may be regressive, and because they favour traditional retail sales taxes as a second-best means of taxing corporate income. As Stephen Gordon has argued, financing generous European welfare states requires the imposition of broad-based value-added taxes at rates higher than the current rates in Canada.6 It is time for Canadian political parties wanting to preserve a relatively generous set of social programs to conduct an “adult conversation” on tax policy and abandon their visceral opposition to broad-based value-added taxes.

The unintended consequences of deciding tax policy via referendum

An independent panel report on the pros and cons of the HST should have been published two years earlier, before the government accepted Ottawa’s Faustian deal. Had the government engaged the public on the subject of sales tax reform prior to accepting the federal offer of $1.6 billion, the passions surrounding the anti-HST campaign might have been contained. Nevertheless, I am far from certain that the overall result would have been different. If legislation exists to enable referendums on tax policy, the temptation to organize an antitax referendum is ever-present. It is not overly cynical to fear that, having tasted blood, well-organized opponents of any particular tax will in the future resort to a referendum campaign. Whether or not such campaigns succeed, they are a massive diversion of political energy from other more useful tasks.

Supporters of democratic innovations have been reluctant to acknowledge these unintended consequences of separating taxation from spending decisions. Doug McArthur is a prominent public intellectual in B.C. and an apologist for the use of referendums to decide tax policy. Here, in summary, is his case that the provincial institutions of petition and referendum proved their worth:

The legislation resulted in legitimate, intelligent and much needed debate. The opponents of the HST understood the issues, communicated effectively and honestly by the standards of political campaigns, and voters responded rationally. The legislation helped to force a recalcitrant government into a review that was legitimate and indeed healthy.

It is widely off the mark to blame either the process or the opponents for the faults of a government that proved incapable of managing the issue. Indeed the process and the outcome speaks to the health and vibrancy of BC politics and its institutions, and not to its dysfunction as alleged by some … has proven to be a legitimate and effective part of the BC policy process that could well be emulated by others.7

It is hard to disagree with McArthur’s conclusion that the government “proved incapable of managing the issue” and that opponents of the HST “communicated effectively.” Maybe opponents “communicated … honestly by the standards of political campaigns,” but the qualification should not be ignored.

Howard Jarvis “communicated effectively” when, in 1978, he stumped California on behalf of an initiative to constrain the growth of municipal property taxes.8 Maybe he also “communicated honestly by the standards of political campaigns.” The unintended consequence of his Proposition 13, however, has been to provide a precedent for many subsequent referendums on tax policy, which have cumulatively stymied the ability of the state government to finance core services adequately. Viewing the dire status of California state finances, Canadians should not be celebrating the victory of Vander Zalm and his followers. Similarly, they should entertain doubts about setting university tuition fees via street demonstrations.

The worst form of government?

In 1945, British voters rejected the Victorian-era vision of Winston Churchill, the triumphant war hero who had saved his country from Nazi conquest. Instead, they opted for the Fabian socialism of the far less charismatic Clement Attlee. Churchill accepted defeat with reasonable grace, and delivered one of the more famous quips about democracy: that it is “the worst form of government except all those other forms that have been tried from time to time.”9 By democracy, Churchill meant representative parliamentary democracy as he knew it.

While far from perfect, parliamentary democracy in which a cabinet can exercise broad discretion with respect to spending and taxation is probably the best form of government in high-income countries with elaborate social programs requiring a correspondingly elaborate taxing effort. General elections are the appropriate mechanism for citizens to pass judgement on their leaders’ performance and select among teams of potential rulers. If, in a general election, voters opt for a conservative government favouring smaller government and lower taxes, fair enough. If, on the other hand, they elect a left-of-centre government that favours more generous social programs and higher taxes, that too is a legitimate public judgement. By contrast, what transpired in British Columbia over the last two years was a lurch toward the “worst form of government.”

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