Equalization, Incrementalism, the Unlikeliness of Rapid Reform

Equalization is a staple of the Canadian Dominion. Policymakers in the 19th century designed and implemented it to ensure that government provided equal services throughout the country and achieve greater balance between the provinces (or, as they were at the time, regions). The rationale is that small provinces, like Prince Edward Island (PEI), should be able to offer the same quality of public services as larger provinces that have greater fiscal capacity. Ottawa collects revenue from each province, based on a complicated formula that takes into consideration income levels, economic growth, and a swath of complex variables, and then redistributes it to those provinces in need.

The structure of Canada’s equalization program results in wealthier provinces contributing to poorer ones. This year, for example, Ontario, Quebec, New Brunswick, Nova Scotia, PEI, and Manitoba–colloquially referred to as the “have-not provinces”–will receive equalization payments, while the remaining four provinces–the “have provinces”–serve as their creditors.

Equalization’s current structure receives a great deal of criticism from both provinces that receive payments and those that provide a net contribution. Although this is a generalization, some believe that the formula no longer works and requires substantial reform. However, there is a disparity between defining the problem and delineating solutions to fix it. In Eastern Canada, for example, critics indicate that the program does not distribute enough wealth throughout the region, whereas those in Western Canada–where three of the four “have provinces” are located–argue that subsidizing the “have-not provinces” is unfair. In fact, some intellectuals question its constitutionality.

The inability to accurately define equalization’s most serious deficiencies precludes the capacity to solve them. For recipient provinces, including natural resource revenues in the equalization formula would increase the scope of its distributional effect. This is problematic, however, as it could also discourage creditor provinces from developing their natural resources (or, much less damaging, it would reduce their total revenue). Furthermore, including natural resources disproportionately penalizes the provinces that rely on developing them.

Conversely, those opposed to equalization argue that eliminating it or reducing its overall scope. Unfortunately, although this would benefit the “have provinces,” it would be severely damaging for those receiving the transfer payment each year–at least in the short-term. Not only would it reduce the size of federal transfer they receive, but also it could encourage residents of recipient provinces to migrate toward the more affluent West, which would only exacerbate the current migratory trend.

Reforming the Canadian equalization programme is difficult: neither those supporting nor opposing it will accept facing negative externalities of whichever reform route the government chooses. Solving this problem requires alternative solutions and, likely, a tremendous compromise between both sides. Alas, it might be better to transfer wealth directly to individuals, rather than provincial coffers, where bureaucratic excess erodes the government’s ability to effectively distribute it to individuals and families.

Ultimately, though, significant reform is unlikely and incrementalism may very well be the only option.

Randy Kaye 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

Government Intervention and Market-Oriented Principles

In public policy discourse, some individuals characterize free-market policies as “pro-business,” “favouring the powerful,” or other phrases intended to invoke an emotional or predetermined response. The truth, however, is often the opposite.

Generally, most people benefit from a freer economy. The paradox is that individual corporations have an incentive to lobby for government handouts, or particular regulations (and the larger the corporation, the easier the process becomes).

New Brunswick recently introduced a catastrophic drug coverage plan amounting to an individual manadate for every New Brunswick family, who must now purchase a drug plan, while Blue Cross will administer a subsidized opt-in to cover a substantial chunk of New Brunswickers. Although the plan is clearly a form of government intervention, it seems to serve Blue Cross quite well. In fact, Blue Cross may stand to gain from the arrangement quite substantially.

What company would oppose forcing people to buy their product by law? The same is true in New Brunswick for automobile insurance. At the risk of someone getting in an accident and not having insurance, there is an individual purchase mandate in New Brunswick for registered vehicle owners. I bet the automobile insurers do not mind this regulation at all!

At the federal level, companies like Chrysler perpetually ask the government for bailouts, even when they are not needed or justified. Chrysler can afford lawyers, lobbyists, and public relations experts for these endeavors and it is easy to imagine that it prefers government intervention. This narrative is also true in the regulatory sphere. Too often, companies will lobby for regulations that punish competitors, while benefiting themselves. Additionally, these arrangements disproportionately punish smaller firms, who may not have a sufficient economy of scale to compete with larger firms under a stringent regulatory regime. Consider food-labelling regulations–McDonald’s can easily afford to hire a dozen chemists to test the nutrient value of their menu, while the food truck run by your neighbor may not.

On the other hand, imagine if businesses actually had to survive market conditions and offer valuable services in order to remain viable. This is a pro-market position. This is what “market-oriented” means. I cannot imagine anything scarier-sounding to someone who is used to bending government laws in their favour.

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

The Freedom of Disassociation

The freedom to associate – that is, the liberty of association protected under Section 2 of the Canadian Charter of Rights and Freedoms–is the individual right to participate, and, by extension, abstain, from any group of choice. This right is a central tenet of democracy, as it protects citizens’ rights to form political parties, interest groups, labour unions, etc., which represent their members’ interests.

Contemporarily, the right of organization is primarily a labour issue and union rights, collective bargaining, and other labour-related issues are at the forefront of this discussion. For example, the Supreme Court used Section 2 to uphold collective bargaining as a constitutional right in the 2007 British Columbia Health Services case. However, while the Supreme Court upholds the freedom to associate with unions, there have been serious Section 2 infringements in Canada regarding the ability to disassociate with unions. Most collective agreements require all workers to join the union at their respective workplace. The Supreme Court upheld this feature on several occasions, such as the aforementioned British Columbia Health Services case and the Quebec Advance Cutting and Coring case in 2001, where the Court upheld the requirement in that province’s construction industry.

Another barrier to the freedom of association comes via the Rand Formula, which the Supreme Court posited in the 1940s. Following its suggestion, several provinces enshrined this formula into law. It requires that all workers in a unionized workplace pay dues to the union, regardless of their relationship with it. In other words, workers must pay for the labour union, regardless of whether they agree with its actions or principles.

These rulings are disturbing insofar as they infringe on the ability of workers to leave their union without leaving their occupation. Although protecting the freedom of individuals to associate with certain groups is important, the other side of it must be the ability to disassociate from them–and unions should be no exception. Correcting this problem requires implementing right-to-work legislation, which would allow workers to leave their union if they are unhappy, while also keeping their job.

Critics of right-to-work legislation often suggest that it will weaken unions. Where this argument falls short, however, is that several developed democracies do not have mandatory union membership. Australia, for example, does not require union membership, yet the labour union density remains nearly 18 per cent and retains a strong presence in many industries, such as education, healthcare, utility services, transportation, etc.

Ultimately, protecting the freedom of association is important for a properly functioning democracy. However, it must go both ways, which entails the right to both join and leave any group. Unions ought not to be exempt from this principle. The provinces should introduce right-to-work legislation as a means of protecting the freedom of association, not because it will weaken unions.

Randy Kaye 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