The Importance of Growth

Of the current issues facing the Canadian economy, the biggest of them depend on how Canada’s trade negotiations with other countries settle. The Comprehensive Economic and Trade Agreement (CETA) with Europe, for instance, creates enormous potential for Canada’s export-oriented industry to expand. In Atlantic Canada, however, there could be severely negative consequences if the provinces fail to take steps that bolster economic growth and attract new talent to the region. The new method of determining health transfer payments, which focuses on population and GDP, is just one illustration of how important economic and demographic development is in Eastern Canada.

Canada’s economic success is rooted in exports, and the export-industry, which is composed primarily of natural resource extraction, has an opportunity to not only supply other countries with raw materials and manufactured goods, but also value-added products. Reducing and eliminating barriers to trade with the European Union (EU) will likely benefit key economic sectors, such as energy, manufacturing, and seafood, and freer trade between Canada and Europe will encourage domestic economic activity, as it expands the market available to Canadian industry. The EU is currently Canada’s second-largest trading partner–behind the United States–and, in 2012, exports to Europe totalled $41 billion. However, it is critical that Canadian industry remains competitive in foreign markets and focuses on value-added products, as well as supplying factors of production. In fact, CETA eliminates protective barriers that currently prevent Canadian industry from exporting value-added products into Europe, and vice-versa, which levels the competition, in addition to providing an opportunity for Canadian-EU businesses to produce the most desirable products.

CETA also creates enormous potential for the Atlantic Provinces to expand the agriculture and seafood sectors into the EU, but they face significant demographic challenges that could restrict new prospects. In the last several years, Atlantic Canada’s population has declined and the average age has increased dramatically. In 2011, roughly 16 per cent of Atlantic Canada’s population was aged 65 or above, compared to 14.4 per cent of Canada’s entire population, and by 2036, Statistics Canada expects it to be around 29.1 per cent (compared to 23.7 nationally). Furthermore, Canada’s labour force increased by 1.1 per cent between 2012 and 2013, however, Atlantic Canada’s increased by half that amount, which is due in large part to an outflow of young individuals and families and an influx of retirees. As a result, the region is not equipped to attract large-scale industry, especially compared to British Columbia, Alberta, and Saskatchewan, and has contributed much less than other regions to Canada’s GDP in recent years. This is an important caveat, considering the federal government will begin calculating the Canada Health Transfer using population and GDP in 2018. If the Atlantic Provinces fail to generate economic growth and attract newcomers, they will receive less than other provinces to fund their healthcare systems, which will become more cumbersome in the future due to an ageing population and declining tax base.

In coming years, these two developments–freer trade and the new healthcare funding mechanism–will play a large role in determining Canada’s economic prosperity and the viability of its healthcare system. Canada’s export sector and healthcare system are rooted historically in the country’s history and it is unclear what changes will materialize because of modifications to them. In any case, the Atlantic Provinces need to take measures that bolster economic growth and attract new talent, both of which will allow them to take full advantage of CETA and other free trade agreements and create a sustainable source of funding for their healthcare systems.

Rachel Lowe is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute

Against Smoking Bans in “Public Spaces”

In Canada, the government prohibits smoking in “indoor public spaces,” which, according to the law, consist of bars, restaurants, bowling alleys, etc. The term “indoor public spaces,” however, is misleading: they are public only in the sense that there are other people sharing the space, yet, many of these “indoor public spaces” are owned by private individuals. There are several reasons for protecting their right to choose whether they want a smoke-free or smoke-filled establishment.

Many complain that smoking in bars is encouraging to nonsmokers and exposes them to secondhand smoke. There are many reasons why this argument may not hold. For now, though, it is more important to focus on the demonization of smoking. By categorically prohibiting restaurant owners from allowing their customers to smoke inside, the government prevents people from doing something they may want to do, i.e. to smoke in a bar or own a bar that allows smoking). Smoking is not good or bad “in itself,” but, rather, it is only good or bad according to individual preference, including, but not limited to, the tradeoff of overall health for immediate pleasure, the terms of which some individuals would happily agree with. Moreover, there is an enormous amount of information detailing the economic, health, and social harms associated with smoking available to consumers that allows them to choose intelligently.

A popular argument for banning smoking in indoor public spaces pertains to workers’ rights: smoking indoors threatens employee health and welfare and because many workers do not have the convenience of choosing their place of employment–so the argument goes–allowing it forces them to choose between inhaling toxic cigarette fumes and unemployment.

To some extent, indoor smoking harms workers. Does that really justify banning it?

Closer examination of firm behavior demonstrates that it varies based on the economic implications of “safety.” Between 2008 and 2010, 700 construction workers died from workplace injuries in Canada. In addition, 637 individuals died in manufacturing workplaces and 329 in the transportation industry. Although these numbers may seem surprising, the theory of compensating differentials explains why outcomes in some industries differ from those in others.

According to the compensating wage differentials theory, workers are compensated by firms in a number of ways: these include wages, nonwage benefits, and working conditions. Any given individual has a set of preferences between these forms of compensation. A risk adverse employee, for instance, may be willing to give up much of his paycheck for a little more safety. Someone comfortable with risk, however, could be willing to put herself squarely in danger’s way for better pay. That some individuals are comfortable with more risk explains why construction workers, for instance, agree to work in dangerous settings: higher compensation allays most concerns, whereas lower compensation highlights them. Firms need to offer compensation for labour to attract workers—when they decrease safety, labour supply shrinks and forces the firm to boost wages. Thus, there is a positive correlation between risk and compensation. And there is no authoritatively “ideal” level of risk; instead, there is a multitude of individually preferred ones.

Thus, to attract workers, owners of establishments that allow smoking indoors would need to offer wages high enough to distract employees from the health hazard associated with working there (assuming these concerns are present). For some workers, the increase in pay would offset their health concerns. Similarly, restaurant owners must consider whether indoor smoking discourages consumers from eating at their establishment. If there is growing opposition to smoking, for example, restaurant owners must choose between allowing customers to smoke indoors and losing whatever percentage of their customer base that refuses to eat in an establishment that permits indoor smoking.

Examining both consumer and employee perspectives on smoking indoors lead to a common conclusion: laws dictating firm behavior typically enforce an arbitrary standard and ignore individual preferences. Instead, the government should allow property owners to decide what is best for their respective establishments and let people pursue their individual desires freely.

Michael Sullivan is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute

Debating Revenue-neutral Carbon Taxes

During the 2008 federal election, proposals to implement a federal carbon tax were a major point of contention. Although Canadian voters ultimately rejected the plan, the issue of carbon pricing remains at the forefront of environmental discourse. This is for good reason: climate scientists, having shown conclusively that the earth is warming, now mostly concern themselves with both the size of the effect, in addition to its primary determinants.

In 2007, the Province of British Columbia (BC) successfully implemented a carbon tax with an important feature: revenue neutrality. The government expected to generate nearly $5 billion annually via carbon taxation and, accordingly, it would reduce personal and corporate taxes by an equal amount. This, in effect, slays one substantial criticism of a carbon tax, which is that it amounts to an additional overall tax burden on individuals, families, and firms. In British Columbia, the policy managed to deter purchases of gasoline and other carbon-intensive products by nearly 10 per cent relative to the rest of Canada, without burdening British Columbians with additional taxes.

Granted, those statistics only measure the carbon that British Columbians purchase in BC. They do not consider the stories of weekend lineups at American border towns where Canadians buy cheaper gas now that the price difference is large. This phenomenon may certainly account for some of the change, but it is quite difficult to imagine this effect being substantial. How much gas must a Vancouverite purchase to justify the two-hour drive, plus the wait in line?

Carbon pricing is also part of the discussion in Atlantic Canada.

In a series of papers published in 2009, University of New Brunswick economist Joe Rugger analyzes the environmental and taxation implications of a BC-styled revenue-neutral carbon tax in New Brunswick. The study found that a tax equivalent of 7 cents per liter on gasoline, applied to all forms of fossil fuel, would reduce carbon emissions in the province by roughly 7.5 per cent. This would occur primarily through higher electricity and heating bills, in addition to consumer purchases of gasoline and oil.

Changing carbon consumption occurs because of two opposing forces. First, making gasoline more expensive creates a “price effect” that causes people to shift their consumption away from gas and towards other things. This is what people refer to when they talk about nudging consumer behavior in a direction hoped to be socially beneficial. The second effect is due to the decreased tax burden–the “wealth effect.” Here, income goes up because of a smaller tax burden. People will then tend to consume, on average, slightly more of everything, including carbon. This works in the opposite direction of the price effect. In the case of BC, it became clear that the price effect was larger than the income effect and, therefore, total consumption was less than it would have otherwise been.

This highlights a confusing irony of carbon pricing policy–anything that makes people richer will tend to mean that they consume more carbon. People should continue to prosper; however, the primary objective is reducing carbon consumption. There are also distributional effects that occur based on the form and target of the tax cuts, as well as consumption behavior. This will be the topic of a second blog post.

In sum, Canadians are becoming more environmentally conscious and they recognize the need for not only fiscal, but also ecological, prudence. In this light, carbon-pricing policies are likely to remain in public discourse. By pairing the carbon tax with associated general tax cuts, rendering it revenue neutral, British Columbia’s experiment shows that it is at least possible to deter carbon consumption, while also minimizing harmful economic effects.

With the upcoming New Brunswick election in the fall of 2014, I would not be surprised if this issue arrives on the campaign trail. Considering recent curiosity in New Brunswick about local shale gas development, this policy has the potential to become quite the wedge issue.

Michael Craig is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute