conservative fiscal policy and meaning it

While the greatest dangers of the financial crisis may no longer be acute, chronic fiscal challenges remain for most western democracies. Demographic change in particular means that higher levels of saving and investment, both publicly and privately, are necessary if standards of living are going to continue to improve.

What are the options for ensuring this?

The #1 priority in my view is continuing with tax reforms which have been occurring in most jurisdictions (Alberta not being one of them) that encourage the shifting of income from consumption to savings and investment. Even if governments were to start diverting massive amounts of their tax revenue away from consumption by holding the line on services and building up financial and physical assets, tax revenue is only a fraction of a jurisdiction's total public and private income and the private sector's contribution, or lack thereof, to the capital stock, whether it be financial or be physical (property, planet, and equipment) has more impact.

But leaving aside further discussion of these tax reforms for another day and restricting our analysis to the income going to government, how can concerned citizens ensure that their governments are going to be genuinely conservative with the resources allotted to them? Although balanced budget legislation is a possibility and is the first proposal I will review, it is but one of many.

Balanced budget legislation

The two basic drawbacks to "no deficits" legislation are the same two problems we will encounter with a lot of proposals, and that is that 1) the policy deals with a flow instead of a stock and 2) governments can and do ignore such legislation. re point (1), a balanced budget requirement can help in that it sets a target minimum contribution to the stock of capital over a period, namely that it be non-negative (zero or higher). But there is nothing inherently problematic with a negative contribution (withdrawal) from the capital stock over some short period since that does not necessarily mean that the total contributions to and growth of the capital stock over the long term will not be superior to some other jurisdiction which makes a null or a positive contribution over every period. Nonetheless, even if the red/black distinction is ultimately an arbitrary accounting measure, it is still an occasional target, and as the Nudge book I mentioned in an earlier post points out, targets have value. The book's authors note how public urination facilities became a lot less messy when users where given something to aim for. Indeed, one could note that Alberta's current fiscal mess started when government revenues cycled upward and former Alberta premier Ralph Klein lost his target.

Legislation that limits government spending to inflation plus population growth

Again, this would set a target for a periodic flow instead of for the stock that actually matters, but it is a superior target to the balanced budget target since it does not mandate cuts at the worse possible time (during a recession) and mandates less spending proportionate to the economy at the best possible time (when the economy is growing quickly). In an interview with the Canadian Taxpayers Federation in September, then Wildrose Alliance leadership candidate Danielle Smith supported this target but added a proviso that spending also not exceed GDP growth. While this response had the virtues of garnering an A+ grade from the CTF and ensuring that the size of government shrinks relative to the economy not only when real GDP per capita is growing but also when it it shrinking, most economists would consider this additional restriction a mistake. The proviso ultimately undoes the advantage over the balanced budget target by being pro-cyclical: forcing government spending cuts when the economy is shrinking. While left leaning economists like Paul Krugman were demanding massive stimulus spending earlier this year, centrist organizations like the OECD were also urging national governments to pass large stimulus packages, and conservative economists like Greg Mankiw were not opposing the stimulus spending per se but rather acting as the voice for skepticism about how effective the particular proposed stimulus expenditures would be. It was generally recognized that "inaction on sound stimulus is indeed harmful." In almost no case was any prominent economist calling for prompt cuts to government spending. As another writer for the Economist notes, "Faced with growing demands on unemployment assistance, [when] states are forced to cut spending elsewhere... this is procyclical behaviour, which may act to increase unemployment further, forcing additional budget cuts, and so on." When one sets aside ideology for evidence based policy, the evidence from the Great Depression suggests that cutting back government expenditure at the same time that consumer expenditure is in decline creates the grave risk of an economic death spiral. Adding the GDP proviso is unnecessary, because when real GDP per capita growth (GDP growth less inflation and population growth) is negative that is by definition temporary (if real GDP per capita is in permanent decline the whole point of economics would be defeated). In other words, the size of government is also a stock, such that whether it is shrunk in every accounting time period is not ultimately germane to the real objective. Real GDP per capita will increase over the long term, meaning that over the long term the size of government relative to the economy will be reduced without adding a further constraining proviso to the inflation + population growth limit. I would also argue that the GDP deflator should be used in the place of "inflation" (I've equated the two in my discussion here) but that's a technical objection.

Legislation that requires a proportion of revenues (often a subset such as supposedly "non-core" revenues, e.g. natural resource royalties) be saved or invested

This target is part way between the above two targets, since while it shares with the inflation + population growth limit the advantage of not requiring cuts during a recession, under this target both spending and saving would grow in lockstep during boom times without an upper limit such that spending growth could still be very high. Again, when at economy is peaking an expansionary fiscal policy just encourages increased prices, and the increase in government purchases shifts resources away the private sector, a phenomenon known as "crowding out."

Combining a capital stock associated limit on spending (excluding infrastructure spending) with mandated revenue hedging

This proposal is my favourite since it has what I believe is an enormous advantage over the other proposals, namely, that governments will not be able to ignore the target because they simply will not have the money to violate the target. In the Alberta of 2007, for example, the government's positions in currency and energy futures would have been marked to market and the government thereby required to plow its windfall royalty income into international hedging markets. In 2009, we would see billions coming back to the province from these same markets. I would exclude infrastructure spending since this constitutes physical investment. While it is possible to invest poorly, and indeed the Alberta government has a consistent pattern of buying high and selling low by choosing to "buy" infrastructure assets when the market is at a top, it is still investment, and by mandating hedging the government's discretion to "buy high" will limited. Stock associated limits to spending could be akin to the covenants that bondholders demand from issuing corporations with respect to the health of their balance sheets as opposed to just their income sheets, or they could be the sort of constraints relatively sophisticated regulators apply to financial institutions (see Basel II), e.g. limits informed by Value at Risk modeling.

"Stock" associated limits to spending discretion may prove too complex to constitute a political campaign plank relative to a readily understandable limit like no more than inflation plus population growth, but hedging, while complex to explain in detail, is quite straightforward as a concept and the general idea that the citizens of Alberta are bondholders and shareholders in their government is also a fairly simple one. Should a politician's pay be tied to the size of the Heritage Fund à la a private sector executive's? The corporate analogy is worthy of consideration, not least because it could ensure more professional and competitiveness-oriented management.

I believe that this is THE challenge of our age. Do we leave something behind for the next generation or not? If we are serious we will not just talk about how we intend to start showing some willpower with respect to the cookie jar, we will explain how it will be placed outside of our reach.

UPDATE October 26:

The Wall St Journal notes that after posting a $1.4 trillion deficit in 2009, the US House of Representatives is now moving on spending bills that would grow domestic programs by a further 12.1% in 2010. The WSJ also observes that "real family incomes fell by 3.6% last year" and the point I wished to make about spending growth that is higher than GDP growth but no higher than inflation plus population growth is that this would or could maintain government services for consumers whose real incomes are falling. Although government would grow relative to the economy during this period of decline, there would no increase in real government services per person and the proportionate growth in government would be temporary. If government services are to be cut back as opposed to just kept from growing further, they should be cut back when real incomes are rising.

But I may have been imprudent to take issue with Danielle Smith in this context. As Don Martin observes in a revealing National Post column, "Ms. Smith was on an Ottawa talk show with me this week and, even though it was still pre-dawn darkness in Calgary, she batted every question out of the park..." The contrast with Sarah Palin being interviewed by Katie Couric (to take one of the most infamous episodes) could not be sharper. The takeaway fact with her is that she is one of the sharpest policy minds in politics, yet getting that most elementary of messages through the North American noise machine will be enough of a challenge without bothering with nuance. This morning Danielle ended up on the website of the Charleston (South Carolina) Daily Mail as "the Sarah Palin of Canada." How does this end up in the mainstream media? The Charleston Daily Mail writer uses the Canadian media as cover:

I figure the Canwest News Service knows something about Canada and the news service has declared Danielle Smith, the new leader of Alberta’s Wildrose Alliance, the Sarah Palin of Canada.

In fact the Vancouver Province writer who is cited here put a big question mark at the end of its "A Sarah Palin for Canada" headline, not a period. But with respect to which MSM outlet surrendered its gatekeeper role to the commercial appeal of another "Sarah Palin" headline that would indeed be Canwest since it was their writer who made a story out of a blogpost by 22 year old Colorado Springs blogger Adam Brickley. The meme was then picked up by Global TV Edmonton and the Examiner.

back from the Wildrose Alliance convention

Before I begin, I should correct something from the previous post. I saluted Harper for heeding the advice of the civil service, when in fact I should restrict that to the central agencies. The line departments are, at risk of overgeneralizing, spenders, and are typically managed by empire builders. Indeed, while I was at Finance the people in the line departments were blasting us regularly for being too tight with the money.

At today's convention, Mark Dyrholm really distinguished himself with his concession speech. He knocked it out of the park, in fact. When he told Danielle supporters that this was "your victory" to celebrate, someone in the audience yelled "it's OUR victory" and without missing a beat Dyrholm declared that as part of a grassroots party he accepts the amendment from the floor. Not only was he extremely gracious, he had just the right cadence, tone, and confidence in his delivery to get the audience on its feet repeatedly. If Machiavelli is correct that it is better to be feared than loved, one could argue that the confidence of Dyrholm and some of those close to him ought to serve them well. With respect to Danielle, Nigel Hannaford wrote an op-ed for the Calgary Herald claiming that, "to know her is to love her." I believe that's true; she comes across as someone who prefers listening to dictating. Her voice is authoritative not because of her tone but because of the substance of what she says. She's someone who strikes me as both Canadian and female in style.

In a Oct 15 comment on CalgaryRants' blog, Dyrholm supporter Craig Chandler claimed that

Quite frankly, if Mark was not in the race and it was just Danielle the media attention would not have been there to the degree it has been.

This race has done great things for our party and both Danielle and Mark deserve some praise for that.

Chandler is correct here. A contested race facilitated a lot of membership sales. Say what you will about Chandler, but he is not politically blind. With Chandler, it's like trying to finesse an 18 wheeler through a slalom course; the driver knows that some pylons are going to go flying given the nature of his vehicle, but that doesn't mean he doesn't understand the course. When a political engagement starts to turn into a loser, he knows it.

will Saturday's vote in fact be an endorsement of any particular agenda?

Whereas the poll by Faron Ellis found the Wildrose Alliance and Liberals effectively tied at 18% in the province, a new poll by an outfit founded by Bruce Cameron finds the WAP 4 points clear of the Liberals at 22% of undecided voters. Although Cameron supported Lyle Oberg's failed bid for the P"C" Party leadership and may have a grudge against Stelmach, his poll is still an eyebrow raiser, since it has Stelmach's PCs just 8 points ahead of the WAP. If one factors out the 12% undecided, the breakdown is

PC 34%

WAP 25%

Liberal 20%

NDP 10%

Green 5%

Others 6%

If a poll were to be conducted immediately after Premier Ed's address to the province tomorrow night, I would expect something of a bump for the governing party, as I suspect Albertans would be reminded of what they like about the guy. As for the Wildrose Alliance, the party may be benefiting from Albertans projecting onto the party what they wish it to be. In my own case, while I've been savoring the prospect of a Fraser Institute alumnus becoming party leader, I've been becoming more aware of how I may have been imagining easy sledding for a think tank agenda post-October 17.

While I don't agree with everything the Fraser Institute has argued for, they are raising the level of the public policy debate. On Friday, October 23, for example, Jock Finlayson and and Niels Veldhuis will be giving a talk in Vancouver titled "Why the HST is good for BC." This is bold stuff: although I am a member of the Facebook group "YES BC HST," the fact of the matter is that there are currently just 412 of us while the "NO BC HST" group has more than 127 000 members.

One of the people whose name has appeared in media reports along with Danielle Smith has written dismissively of "wonkish ruminations." Should Danielle become premier and someone like this become a powerful chief of staff for her, unsolicited policy proposals from the wonks will get about as far as advice from the PCO gets with Harper, which is to say, not very. What would be solicited would be "policies" that would lend themselves to gimmicks like having the premier appear before the cameras holding an oversized novelty cheque made out to the political target group du jour.

Of course, in the Wildrose Alliance the leader does not dictate policy anyway. But if the leader were to be one of the 5 members to sponsor a policy proposal to be taken to the floor of the AGM for a membership vote (as provided by the party constitution), the proposal would be taken seriously by both the membership and the media. Since the leader is not going to jump into this policy process without consultation with some sort of inner circle (especially someone like Danielle Smith, who is a listener as opposed to a teller and someone who seems to like a collaborative approach), just who these advisors are is going to matter. What concerns me is that I am not aware of an anti-populist faction in the party while there are more than enough people who are inclined to take a page from Stephen Harper's playbook and make (supposed) political payback the decisive criterion for a policy move. Of particular concern is environmental policy; although the membership dealt with social conservative issues at the last AGM quite judiciously, it seemed to me that people like myself who stood at the microphone to argue for environmental measures, and people like Paul Hinman who demonstrated his political experience by showing sensitivity to environmental considerations in their microphone remarks, were facing a skeptical audience. If you can't sell a green tax credit that makes no presumptions about global warming one way or the other, then what can you sell?

This idea that the leader is not the only person who matters makes the argument for voting for Danielle Smith on Saturday stronger. Why? Because Danielle Smith is an outstanding communicator and is close to an ideal candidate for the face of not just this party but any party that isn't totally at odds with a conservative or libertarian perspective. As such, she would be an asset for all of the background movements in the party, whether libertarian, social conservative, populist, or "wonkish." This is to suggest that followers of each persuasion would better serve their own interests by voting for Danielle Smith and then trying to pass their preferred planks at annual general meetings or getting like minded individuals into positions in the party that would be high on influence and low on media prominence. Leave the limelight to the leader; this leader.

A vote for Danielle on Saturday is a necessary but not a sufficient condition for the party to be perceived as a viable government in waiting. She was to both win and have significant freedom of action. She isn't, and wouldn't be, my idea of perfect on policy; to take one example, I'd prefer to treat the royalties matter as a sub-point to the issue of general business taxation, as opposed to making an issue out of how one industry is faring. But it would still be a tremendous wasted opportunity if the party membership and/or the "party elders" managed to limit her to being the party's spokesperson. Saturday will hopefully see Danielle indisputably installed as the party's face, but it won't be enough if she is not also indisputably installed as the party's leader.

Edmonton! meet Danielle Smith Thursday evening

Danielle has generated political momentum in Alberta like nobody since Preston Manning. If one took the number of Alberta Liberal party members and increased it by 50%, it would still be less than the number added to the Wildrose Alliance party membership rolls just this summer.

Meet the candidate for a speech and moderated Q and A at the Four Points Sheraton (7230 Argyll Road) at 7:30 pm this Thursday, October 8th.

Everyone welcome, both members and not-yet-members.

move ahead Manitoba

Danielle Smith has been twittering away on the Fraser Institute's ranking of investment climates for oil and gas. As she should. The Institute's latest Global Petroleum Survey surveyed 577 energy executives from around the world and found that Manitoba, with a NDP government, is considered a more attractive place to invest than Alberta. Internationally, Alberta clocks in at #92 out of 141.

So what do Alberta bloggers have to say about this? After a couple of days of opportunity to respond, CalgaryGrit, Daveberta, Ken Chapman, Enlightened Savage, TinyPerfectBlog, StraightOuttaEdmonton and more have all apparently felt this news either unworthy of note or in need of being buried. Evidently the throw-away remarks of MLAs or the parental opt-out clause of Bill 44 are of greater consquence to this province. re Bill 44, as I've said before, if parents pulling their kids out of the public school system entirely isn't news, since when would the (at this stage entirely hypothetical) pulling them out of a handful of classes be news?

Fortunately, the MSM has latched onto this survey of energy executives, with the national Globe and Mail, Financial Post, and CBC picking up the story, in addition to the reliable Calgary Herald and AM 660.

A glance at the comment threads attached to these media articles, however, goes a long way to explaining why Alberta is free-falling down the chart. The most recommended (by readers) comment on the CBC story contends that a Fraser Institute report has "no credibility". Why? Because the Institute is "sponsored by US evangical groups" [sic]. Why a US evangelical group would sponsor a think tank that calls for the legalization of marijuana I don't know, yet this gets 116 thumbs up and just 28 thumbs down. Another commentator declares that "Quoting a "study" by these propagandists only dampens the credibility of the media outlet which publishes it." This is why we hear a deafening silence from Alberta-based bloggers I suppose: they are protecting their credibility!

This whole "credibility" line of attack might pack more punch if it did not have to be wielded against all the other think tanks that have criticized this government. Are the government's own fiscal responsibility commissions, which have called on it to get its savings policy in order (calls which have been repeatedly ignored), also short on credibility? This Fraser report is all too consistent with reports like that of Jack Mintz, who has noted that Alberta's business tax environment is worse than average out of an 80 country sample. Jack Mintz is considered by most public policy experts to be the most authoritative academic in the country with respect to tax policy (call any senior professional economist working at Finance Canada for confirmation). Mintz has also noted that provincial taxes are on track to rise from 8% to 11.2% of the economy by 2020. That is a bigger proportional growth in the size of government than even the worst case scenarios for Obama and the government of the United States. The Americans are at least having a debate about the policies of someone the Germans have dubbed "the Debt President." My fellow Albertans seem to be standing around in stunned silence.

I returned from Ottawa before the last provincial election to run for the Wildrose Alliance party because I was convinced it did not have to be this way. The province has a relatively educated electorate. Unfortunately, advocating for business interests is received about as well by the general public as trying to defend lawyers. Can the situation be changed? The number of cases where a libertarian or pro-business party has formed a government in a western democracy are few. Looking at Germany's FDP, for example, its best chance at influencing government is in coalition with Angela Merkel's Christian Democrats. But sooner or later the public will have had enough, and that point will come when the flight of investment adds up to a lower standard of living. That decline can be masked by deficit spending, but only for a while. I can only hope the damage is still reversible at that point.